Avoid This Stock or Buy This Stock on Sale This Cyber Monday?

Target is off to a rough 2022. The stock price is down 30% year to date and was crushed after its latest earnings release.  Target is a Dividend King that has gone through rough stretches before.  When a company’s stock price is down, that is when we typically like to act. Therefore, in today’s article, we will perform a stock analysis for Target to determine if the company’s stock is on sale or if it is a stock to avoid in the short term!

Target Stock Performance in 2022

2022 has been a tough year for Target’s stock price. The company’s stock price is down 40% year to date. That’s not fun, especially for a company that was featured in our past 5 Stocks to Always Buy article.   The company’s peak stock price (as you can see in the chart below) was in April 2022. After that, the price has fallen off a cliff as the impact of lasting inflation began to take hold.

The company recently released earnings this month. There wasn’t a ton of great news buried within the company’s earnings release. While the company’s top line quarterly sales grew (3.4%), the company’s profit fell 50%. The company has an inventory glut, which dragged the company’s earnings in the quarter. Why? In order to liquidate this excess inventory, Target was forced to sell products on sale. This either resulted in a small profit for each item…or even a loss. That’s why excess inventory is so brutal for a retail company that operates in a sector that has razor thin margins. With EPS and margins coming in below expectations, it is easy to see why the market isn’t overly optimistic about Target in the short term.

In addition to the earnings release, Target warned of softening demand and a weaker holiday shopping season. Inflation isn’t only impacting Target’s costs, it is also crushing the budgets of Target’s consumers. If consumers have less money to spend, they will start cutting their budgets in categories that Target benefits from.  Target didn’t release an updated guidance range this quarter. However, its clear that the company’s issues will continue into the 4th quarter and beyond. Unfortunately for Target, the holiday season represents a large portion of their sales.

Dividend Diplomats Dividend Stock Screener

Time to run Target through the Dividend Diplomats Dividend Stock Screener. We use 3 SIMPLE metrics to evaluate every dividend stock. The goal of our stock screener is to identify if a stock is an undervalued dividend growth stock to buy.

Watch: Our Simple, 3 Step Stock Screener

Here is a rundown of the 3 metrics of our stock screener:

1.) Price to Earnings Ratio Less than the S&P 500. Currently, the S&P 500 is trading at a P/E Ratio between 19X – 20X.

2.) Dividend Payout Ratio Less than 60% (Although we think a perfect payout ratio is 40% – 60%). The payout ratio measures the safety of the dividend. This ensures the company can continue growing its dividend during good times and bad. That’s why it is a critical metric in our stock screener that we must evaluate!

Read: Dividend Aristocrats with a PERFECT Dividend Payout Ratio

3.) History of Increasing Dividends. We review this metric by reviewing the company’s five-year average dividend growth rate and consecutive annual dividend increases. Since we are long term investors, it is important that a company increases its dividend consistently!

Bonus: Dividend Yield. We like to also throw in a bonus metric to our dividend stock analysis. Yield does not drive our decision; however, we would be lying if we said we completely ignore dividend yield.

How Does Target (TGT) Perform in Our Stock Screener?

For this analysis, we will use Target’s stock price $163.38 (November 25, 2022 close). We will use an annual EPS of $5.52 per share for the purposes of this analysis. The company’s annual dividend is $4.32 per share. Now that we have the inputs for our analysis, let’s dive into the results.

1.) Price to EPS Ratio: 29.60x.

2.) Dividend Payout Ratio: 78.26%. 

3.) History of Increasing Dividends:  Target is a DIVIDEND KING. They have increased their dividend for 50+ years.  The company’s five year dividend growth rate has been solid at 10.55%. Transparently  though, I wouldn’t expect the company’s dividend increase to touch the five-year average for a year or two based on the company’s current results.

4.) Dividend Yield: 2.64%

Summary- Target (TGT)

This one is pretty cut and dry to me, unfortunately. Based on the results of our stock screener, Target is not a stock to buy today. The company’s P/E ratio is well above the market and the Payout Ratio is well north of our 60% threshold due to the company slashing its guidance.

With that said, I’m still long Target in the long run. I own 92 shares and would love to cross 100+ in the future. The company’s estimated EPS of $5.52 per share is significantly less than the company’s 2024 projected EPS ($9.00+ per share).  IF the projections can hold true, the company’s payout ratio will fall below our 60% threshold and will be closer to the company’s historical average. Once that happens, I’ll start considering a position in Target again. Unfortunately though, that day is not today.

What do you think of Target? Are you buying Target during this tough 2022? Or are you looking elsewhere in this market?


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