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Target Corp. (NYSE: TGT) stock has lost 15% of its value over the past 12 months, as retail stocks in general are out of favor. Target operates in a highly competitive environment, and faces an emerging threat from Internet retailers, most prominently Amazon.com (NASDAQ: AMZN).
Investors worry about Target’s future prospects in a rapidly-evolving retail landscape. But Target’s growth strategy remains intact, thanks to investments in new business initiatives. Plus, Target stock sports a solid 3.5% dividend yield, and an attractive valuation.
As a result, long-term investors could view the recent share price dip as a potential buying opportunity.
Strategic Plan for Growth
Target’s share price has declined, despite the company making significant progress in its strategic initiatives, the most compelling of which is its e-commerce business. Target’s e-commerce sales jumped 16% last quarter. Growth in this area has helped the company fend off internet retail competition.
Another key area for growth is its small-store format. Target is building stores with less square footage in many big cities, which don’t have the space for a typical store. These “flex-format” stores, as management calls them, are ideally suited for dense cities and suburbs. In July, Target opened up new flex-format locations in Philadelphia, Chicago, Boston and New York City.
Target’s small-store count is up to 20, and it plans to add nearly 20 more in 2017.
Lastly, 2016 should end on a positive note for Target, because there are indications that this year’s holiday shopping season will be a strong one. The National Retail Federation forecasts 3.6% growth in total holiday sales this year, excluding autos, gas, and restaurants. This would be above the average growth rate in the years since the financial crisis.
Separately, the International Council of Shopping Centers projects 3.3% growth in spending at retail stores this holiday season, which would be up from 2.2% growth last year. A strong holiday shopping period would be great news for Target, which relies heavily on the fourth quarter.
Target Stock: Look at the Dividends
Target is a highly profitable company. Last year, it grew adjusted earnings per share by 11%. Continued increases are likely up ahead, given Target’s growth catalysts. And, the company also uses its cash flow to buy back stock. Target recently approved a $5 billion share buyback, which will help boost future earnings growth.
Investors who like dividends may also find Target stock interesting. Target’s share price decline has elevated its dividend yield to 3.5%. The S&P 500 has an average dividend yield of 2%. And, Target has a long record of reliable dividend growth. It has raised its shareholder payout for 45 years in a row, qualifying it as a Dividend Aristocrat. Its most recent increase was a healthy 7% hike earlier this year.
In all, Target expects to return at least $3.5 billion to investors this year in combined dividends and share repurchases.
Based on its Oct. 5 closing price of $67.74 per share, Target shares are valued at a P/E ratio of 12. That means investors can buy $1 of Target’s earnings for $12. By comparison, the S&P 500 is valued at a P/E of 20. Target stock is on sale in relation to the broader index.
Sales Growth, Dividends
Investors are doubting Target’s growth prospects in the age of Amazon, but physical retail still provides value for consumers. Target’s sales grew last year and the company is off to a good start in 2016. It has many growth catalysts to look forward to.
Target stock looks attractive for income investors. The company has paid nearly 200 quarterly dividends without interruption. Such an impressive dividend history is due to Target’s highly profitable business model and consistent growth each year. Over time, Target has demonstrated an ability to navigate the retail environment and respond to changing consumer preferences.