Is Target Stock a Dividend Darling or Deadbeat?

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Target (TGT) can't seem to do much right these days.

The Target CEO resigned in disgrace as the fallout from the credit card security breach last year continues to build. Sales are down at TGT, as customers have been timid about swiping their cards at Target, fearing their data could be compromised again. And Target's expansion into Canada 14 months ago has proven to be an unmitigated disaster f0r TGT stock, generating roughly a billion dollars in losses so far.

At a time when brick-and-mortar rival Walmart (WMT) is gaining ground on Amazon.com (AMZN) in online sales, Target's online presence hasn’t amounted to much. Up until as recently as 2011, Target depended on Amazon for site hosting and fulfillment.

Yet while Target has had its share of operational setbacks of late, Target stock has been the shining light of shareholder friendliness. Target has raised its dividend every year since 1967 — a run of 47 years and counting — and it has also been a serial share repurchaser. Since 2002, Target has reduced its shares outstanding from 1.3 billion to just 638 million as of its last reporting. That's a reduction of 44% in TGT stock.

Let's return to Target's dividend growth. The TGT dividend has grown by 19% over the past year, which would be good news by itself. But what is truly impressive is the consistency. Target has grown its dividend by a compound annual rate of 20% for the past 10 years. And going back 20 years, it's a not-too-shabby 13%.

Think about the past 10-year period. It's been a never-ending string of crisis with one of the worst recessions in U.S. history in the middle. Yet Target stock still managed to raise its dividend at a 20% annual clip.

To put that in perspective, at a 20% growth rate, the dividend doubles every three-and-a-half years.

Today, TGT stock pays a quarterly dividend of 43 cents, or $1.72 per year. That works out to a dividend yield of 2.9% at current prices. That may not be an eye-popping yield, but it’s significantly higher than what can can expect from the 10-year Treasury bond, which yields 2.6%.

Let’s have a little fun with the numbers: Let’s say that Target continues to raise its dividend by 20% a year. That $1.72 annual payout would grow to $10.65 over 10 years. You effective dividend yield on your cost basis would be 18%. And this, of course, says nothing about capital appreciation or dividend reinvestment.

OK, Target is in something of a rough patch right now; I get that. So maybe 20% annualized dividend growth isn’t realistic. Let’s say something more along the lines of Target’s 20-year average of 13% is more likely. That $1.72 annual dividend still grows to $5.83 over 10 years, giving you a 10.0% dividend yield on your original cost basis.

Bottom Line

Should you run out and buy TGT stock today? Based on valuation, I would say that you certainly could. Target stock is priced at just 12 times forward earnings and 0.5 times sales, although a better approach might be to average in over the course of a few months.

It’s too early to know whether the bloodletting in Target stock is over; should Mr. Market not like the new CEO when announced, we could easily see another round of selling. But if you’re looking to buy a dividend-raising superstar to fund your retirement, put some Target stock in your shopping cart.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long WMT. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today's best global value plays.