Do you like to get a great deal and also get some yield? Target (NYSE:TGT) is a dividend king, and the company certainly isn’t too richly valued. Granted, you might not like all of Target’s financial stats, but there’s nothing too objectionable. Consequently, I am bullish on TGT stock now that it’s trading at a discount.
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Target is one of the two best-known U.S. big-box physical retail stores. Only the almighty Walmart (NYSE:WMT) is bigger than Target.
It could be argued that Target’s financials are a pretty good gauge for the American economy as a whole. Of course, inflation has caused problems for the economy and, more specifically, for Target. However, since the market was undoubtedly aware of persistent inflation, it shouldn’t be very shocking if Target’s revenue isn’t growing. Still, short-term traders chose to punish Target anyway, so there may be a great opportunity for value and dividend investors.
Why Did Target Stock Drop 8% Today?
Today wasn’t an enjoyable day for Target’s long-term shareholders, as the stock fell 8% in a single trading session. The stock market was down slightly, but clearly there was a company-specific catalyst that prompted fear and loathing of Target. The culprit was Target’s first-quarter 2024 earnings report, which the company had just released this morning. Surely, Target’s results must have been severely “off target,” right?
As it turns out, the results certainly weren’t ideal, but they didn’t justify an 8% share-price drop, in my opinion. Target CEO Brian Cornell emphasized that the company’s quarterly performance was “in line with our expectations on both the top and bottom line.” Did Target’s results measure up to Wall Street’s expectations, though?
Let’s start with the basics. In Q1 of 2024, Target’s revenue declined 3.1% year-over-year to $24.5 billion. This was basically in line with the consensus estimate of $24.52 billion in quarterly revenue.
In other words, practically everyone involved already knew that Target’s revenue would decrease by around 3.1%. In a spoiled market, however, there’s a difference between what’s expected on paper and what’s really expected. Nowadays, the market wants companies to consistently beat expectations, so in reality, the actual expectations are higher than what’s been stated beforehand.
Perhaps Walmart is to blame for this, to a certain extent. Walmart has beaten Wall Street’s quarterly EPS forecasts for quite a while now. I suspect that one less-than-stellar quarter might cause traders to freak out and sell their Walmart shares. Thus, I’m positing that Target’s results were adequate, but the market doesn’t accept adequate results anymore.
Target’s Not-Terrible Earnings and Decent Dividend
Furthermore, Target’s Q1-2024 bottom-line results weren’t terrible. The company’s earnings declined 1% year-over-year to $2.03 per share. This result fell just slightly short of the consensus call for $2.06 per share.
That result wasn’t exactly in line with Wall Street’s projections, but it was pretty close. Target’s management acknowledged that the company’s quarterly results reflected “continued soft trends in discretionary categories.” In other words, due to inflationary pressure, shoppers have cut back on purchases of non-essential items.
It’s not as if Target’s management is just sitting around and allowing this to happen, though. In order to attract budget-conscious shoppers, Target announced that it will lower prices on more than 5,000 frequently purchased items, including milk, pet food, fruit, and diapers. I think that this will be a win-win for the company, as Target could entice more shoppers into its stores, and customers would certainly appreciate a bargain.
Speaking of bargains, Target stock should be more appealing to value seekers after the share-price sell-off. I dusted off my old calculator and found that Target’s trailing EPS for the past year comes in at $8.91. Target stock’s closing price today was $143.27, so the company’s trailing 12-month price-to-earnings (P/E) ratio is $143.27 / $8.91, or around 16x. Meanwhile, the non-GAAP sector median P/E ratio is 18.19x, so Target doesn’t appear to be overvalued at all.
Finally, if we stick with the share price of $143.27 and assume that Target continues to pay quarterly dividend distributions of $1.10 or annualized payouts of $4.40 per share (though it wouldn’t surprise me if Target raises its dividend since the company has a history of doing that), we’ll arrive at a forward annual dividend yield of around 3%. That’s quite decent compared to the consumer defensive sector’s average dividend yield of 2.125%.
Is Target Stock a Buy, According to Analysts?
On TipRanks, TGT comes in as a Moderate Buy based on 20 Buys and eight Hold ratings assigned by analysts in the past three months. The average TGT stock price target is $189.08, implying 32% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell TGT stock, the most profitable analyst covering the stock (on a one-year timeframe) is Michael Baker of D.A. Davidson, with an average return of 23.57% per rating and a 65% success rate. Click on the image below to learn more.
Conclusion: Should You Consider Target Stock?
The market really ought to have anticipated persistent inflation’s negative impact on Target in the first quarter. I suspect that short-term traders knew what to expect but are spoiled and unforgiving when anything less than stellar happens nowadays.
I believe it’s their loss and, potentially, your gain if you choose to pounce on this prime value-and-yield opportunity. Target is doing about as well as expected, financially speaking, but the share price is lower and the dividend yield is generous. So, I am absolutely considering a long position in TGT stock today.
