Why Target’s Dividend Growth Outshines Coca-Cola

Aldel Galo | June 24, 2024

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Coca-Cola (NYSE: KO) epitomizes dividend reliability with 62 years of consecutive increases, boasting a 3.1% yield bolstered by a business model resilient against economic downturns. It remains a bastion of safe passive income for investors. However, another Dividend King, Target (NYSE: TGT), merits a closer look despite its recent challenges.

Target’s recent trajectory has been tumultuous. After hitting a three-year nadir in early October 2023, it rallied but has since retracted by 13% over the last quarter. Although Target’s revival from its low points has been notable, the retailer faces ongoing pressures that suggest its recovery could be protracted. Nonetheless, the current conditions could present a compelling buying opportunity.

The retailer’s roller-coaster experience commenced with an all-time high in 2021, buoyed by a surge in goods spending during the peak of the COVID-19 pandemic. Enhanced curbside pickup and e-commerce initiatives propelled Target to a record profit of $6.95 billion in fiscal 2021. However, the retailer misjudged subsequent demand for discretionary items, a critical factor for retail success. Effective inventory management and a resonant product mix are pivotal; excess or misaligned inventory can significantly dent profitability.

In response to these challenges, Target has diligently adjusted its inventory strategies. From a peak of $17.1 billion in the third quarter of fiscal 2022, inventory levels dropped to $11.7 billion by the first quarter of fiscal 2024, a 26% decrease. This reduction, facilitated by aggressive discounts through Target’s Circle loyalty program and streamlined operations, has boosted its trailing-12-month operating margin to 5.3% from 3.5% a year earlier.

Target’s Chief Financial Officer and Chief Operating Officer, Michael Fiddelke, highlighted on the earnings call that inventory growth has been outstripped by sales increases over the past five years—a trend that is sustainable and expected given the rise in sales per store and inventory turnover. Moreover, recent improvements have reduced out-of-stock rates by 4% for its top-tier items compared to the previous year, indicating a more refined approach to stocking high-demand products.

Despite these improvements, Target remains susceptible to broader consumer behavior trends, particularly in discretionary spending. Factors like escalating credit card debt and unaffordable housing, coupled with soft retail sales data from the Commerce Department, signal potential headwinds for GDP growth. This sensitivity to consumer spending, compounded by inflationary pressures, underscores the challenges faced by many consumer-focused retailers.

Yet, there is a silver lining for long-term investors. Target recently uplifted its quarterly dividend by 1.8%, reaching $1.12 per share, which equates to an annual payout of $4.48. This increase marks its 53rd consecutive dividend raise and the 228th consecutive dividend payment. With a forward yield of 3.1% and a payout ratio of 49%, Target’s dividend profile remains attractive, particularly in comparison to the broader market.

Key Takeaways:

  • Inventory Management: Target’s refined inventory management is crucial for its turnaround.
  • Dividend Reliability: Target’s consistent dividend increases make it a viable option for dividend-focused investors.
  • Market Conditions: While consumer spending remains unpredictable, Target’s strategic adjustments position it well for potential recovery.

Conclusion: Target’s journey through market fluctuations demonstrates its resilience and adaptability. Although the retailer faces ongoing challenges with discretionary spending and broader economic indicators, its proactive inventory management and appealing dividend yield offer a promising investment for those with a long-term perspective. Investors might consider adopting a patient approach to fully capitalize on Target’s gradual but steady path toward recovery.