Target Corp (NYSE:TGT)

CAPS Rating: 3 out of 5

The country’s second-largest discount chain, Target shoots to be more upscale than rivals with a focus on design.

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Player Avatar notyouagain (64.17) Submitted: 8/1/2014 9:27:27 PM : Outperform Start Price: $59.79 TGT Score: +16.22

Here's to laughing at the red thumbs with their shortsighted short term outlook.

Target has had some negative PR...that's a good time to take advantage of its backing off its 52-week high, right?

I don't have my calculator with me while I'm sitting here in the hospital waiting room waiting for my girlfriend to get a CAT scan, so I can't bore you with my usual numbers. I'll just have to rely on published ones.

Target has increased its dividend... year in and year out.... for 42 years straight. Think about that. The quarterly payment for September will be $0.52.

The quarterly payment previous to that was $0.43.

I don't need a calculator to figure this to be about a 21% boost.

And the payout ratio is still about 56%, according to the Fool.

With a 5-year dividend growth rate of 21.65%, the rule of 72 suggests this dividend would DOUBLE in less than four years.

Let's be skeptical. Let's say the dividend growth is slowing down and it doubles in SIX years (a 12% average dividend growth rate).

Think it'll be selling at $60/share with a $4.16 annual dividend?

The only way that'll happen is if Amazon truly does take over the world and all the brick-and-mortar stores are failing.

Anyway, back to that "rule of 72".

If you've never heard of it, it's can come in handy. If you're wondering how long it would take for an investment or a number to double at a given rate of annual growth, you divide that rate of growth into 72. The result is about how many years it would take for that number to double.

Conversely, you can divide the number of years into 72 and the answer will be roughly the growth rate needed for a number to double in that many years.

Anyway, hovering at around $60 and paying an annual dividend of $2.08 gives us a current dividend yield of about 3.5%. Target's average dividend yield over the last five years is 2.2%. Getting into a stock at a higher than average yield has two advantages.

One, I've always considered the dividend yield one of many value metrics. A higher dividend yield might be signaling a good buy just as a lower PE does. At a lower price, you get a higher dividend yield and a lower PE.

Two, buying when the dividend yield is at 3.5% vs 2.2% gives you more bang for your buck, no two ways about it. It jump-starts your returns and for the same money invested, your dividends will be higher, and so your reinvested dividends will buy more shares. You get faster compounding.

Look at it this way. Since the average dividend yield for Target was 2.2% during the last five years, there may be people who bought shares a year or two ago and have held them through two dividend increases that still aren't getting a 3.5% yield on their original price paid yet.

Target has an interest coverage of 7, so they earn about $7 for every dollar they pay in interest expense. That isn't spectacular but it's nothing to be concerned about.

Taking a conservatively skeptical view and assuming this dividend will only grow at a 12% growth rate as I did earlier really is probably leaning towards being ridiculously conservative.

When this dividend has doubled, this will not be a $60 stock. If it was, then it would be yielding almost 7%, and unless the company's in big trouble, that just isn't going to happen.

See my Microsoft pitch for more thoughts on how and why share price growth tends to rise pretty much in step with dividend growth.

Target has a beta of 0.55, which, like most of my picks, means that while it probably won't go up as fast as the rest of the market, it will probably tend not to fall as fast or as far either.

That's fine. Slow and steady is fine. Not trying to outsprint anyone here.

My start price, something I always like to note before the first dividend payout changes it, is $60.78.

Target has a current ratio of about 0.90, which I will fly in the face of conventional wisdom warning people about current ratios of less than 1 and say I'm fine with it.

Those of you who have read "Warren Buffet And The Interpretation Of Financial Statements" will understand why that doesn't bother me.

Those of you who haven't read it... get it. The authors are Mary Buffet and David Clark. The book is awesome. If you want to buy individual stocks you need this book on your shelf.

That's it. This is a long term pick, but I won't be surprised in the least if some of the geniuses around here are on my case to admit I blew it in less than eight months.

Long term, smart guys. Come bugging me in five years about it.

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Member Avatar notyouagain (64.17) Submitted: 8/2/2014 1:16:35 AM
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Just checked @ Yahoo! Finance. Wish I hadn't missed putting this in my main pitch.

Yahoo! Finance lists a current PE of 20.22 and a forward PE of 13.95...

And a PEG ratio of 1.25.

Member Avatar notyouagain (64.17) Submitted: 8/20/2014 9:50:51 AM
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My beginning start price, as noted above, was $60.78.

TGT went ex-dividend on 8/18/14. CAPS hasn't adjusted my start price for it yet, but 8/18/14 was ex-dividend day for TGT, and on 8/18/14 shares of TGT opened at $58.05.

The dividend of $0.52 is assumed to be reinvested at the opening price on ex-dividend day.

It goes

1 / 1 plus (dividend amount / ex-div day opening price). X your current start price =. Your new start price.

So 1 / 1 plus ($0.52 / $58.05) X $60.78. = what should become my new start price for TGT when the Fool gets around to adjusting it. They've been late before. It's ok. My new start price should be $60.24.

Member Avatar notyouagain (64.17) Submitted: 8/26/2014 7:24:02 PM
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After repeatedly contacting the Fool, I'm beginning to wonder if the start price for my TGT pick ever will receive its dividend adjustment. I just can't seem to get this fixed. TGT went ex-dividend on 8/18/14, as noted above.

My start price of $60.78 on 7/23/14, is documented in my pitch, which was submitted on 8/01/14. This was 2 weeks before the ex-date. My start price should have been adjusted downward to reflect the dividend 8 days ago. Hate to keep nagging them, but my whole strategy in CAPS centers around dividend investing.

That start price steadily declining with each dividend payout reflects my steadily increasing yield on cost.... which is my major focus in investing.

Member Avatar notyouagain (64.17) Submitted: 9/1/2014 12:18:25 AM
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There. My new start price is $60.25. They rounded up; I rounded down. It's all good.

But looking at the quarter ending in July sure makes me nervous. What I'm seeing doesn't quite support what I saw in Yahoo! Finance's PE and forward PE numbers.

TGT's total equity as of the July balance sheet was $16.433B. Total shares outstanding were 633.64M. That gives us an equity per share of $25.93.

Now to the quarterly income statement. Net income was $234M. This gives us earnings per share which, when rounded up, are $0.37.

Let's figure return on equity. (Net income/share) / (equity/share) = Return On Equity.

So, $0.37/$25.93 = 1.43%.

This is troublesome. With an equity/share of $25.93, we need a return on equity of 2.01% just to support the $0.52 quarterly dividend.

Of course, GAAP earnings include noncash expenses like depreciation/amortization, but TGT bears watching. If revenues don't pick up I'll have to bail.

Member Avatar notyouagain (64.17) Submitted: 9/1/2014 12:28:31 AM
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That dividend was probably paid out of cash and retained earnings.... retained earnings went down, as did shareholder's equity.

Companies can rough it over tough stretches that way for awhile. Wise dividend investors keep an eye out for troubles like this so they can bail BEFORE possible dividend cuts.

I think it's temporary... but I won't be stubborn about it. Better to get out and be wrong than to cling to a position and find out I was right... right?

Member Avatar notyouagain (64.17) Submitted: 9/1/2014 2:59:39 AM
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While I really like the dividend growth story, and 5 years from now could very well see the dividend still in place with uninterrupted growth, I simply see no moat here. I see a business in a hotly competitive sector struggling to keep its head above water. Of course, that could very well change.

But if I'm truly running this CAPS portfolio as I would if real money were involved, I must shut this pick down. The spread between PE and Forward PE has narrowed. TGT had to seek the cash elsewhere besides earnings to cover costs and pay the dividend last quarter. Retained earnings took a hit. Shareholder's equity took a hit. Enough. If I had real money in it, I would cash out and put it somewhere that had some semblance of a moat, more earnings stability.

Member Avatar notyouagain (64.17) Submitted: 9/1/2014 2:47:05 PM
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The problem is lack of conviction either way. Lacking conviction leaves one plagued with doubts. Even now, I could still hit "cancel" and change my mind about closing this pick. Upon further reflection, I still may. I have until tomorrow to think about it. Giving up on a 5-year pick this early feels wrong.

A company doesn't put a 42-year streak of annual dividend increases together without a commitment to enriching its shareholders, and TGT's most recent increase of 21% is sending its own unmistakable signal to shareholders, one that shouldn't be ignored.

Giving TGT a few more quarters to see what happens might be better than closing it now, and if I do that, perhaps sometime during that time I would get an opportunity to close this pick in positive territory.

TTM PE is now 20.29, with a forward PE of 15.77 and a consensus estimate of $3.19 EPS IN Jan '15.
That would mean a forward payout ratio of 65%.

I'm going to stick.

Member Avatar notyouagain (64.17) Submitted: 11/10/2014 1:53:18 PM
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I'm hanging in there. After just checking at Morningstar.com, I found that net margins are at a 10-year low, reflecting their struggles of late.
The net margin in the trailing twelve months is only 2.7%. This 10-year low net margin is causing their Return On Assets to also be at a 10-year low, even though Asset Turnover is at a 10-year high!
TGT is still reeling from the credit card fiasco of last year.
Margins will recover.
Meantime, price/sales is at a historical low level.
Price/sales is a ratio worth looking at in a situation like this. If you think margins are depressed and will get better, and price/sales is at a low, then when margins improve price/sales should increase...

Member Avatar notyouagain (64.17) Submitted: 11/19/2014 10:45:17 PM
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My beginning start price for TGT was $60.78.

The first quarterly payment of $0.52 lowered it to $60.25.

On 11/17/14, TGT went ex-dividend again, with a payout of $0.52 and opening at $67.58.

1 / 1 plus ($0.52 / $67.58) = 0.992364

0.992364 X $60.25 = $59.7899... to $59.79, my new start price for TGT.

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