A Big Upgrade For Dividend King Target

Target Will Emerge Stronger After The Virus

Today’s retail sales figures confirm what we all know is happening, consumer spending across most retail categories is shrinking profoundly. Despite this fact, store operators like Target are getting upgrades that spell higher share prices in the not-too-distant future. Today’s top story comes to us from BMO Capital and involves one of my favorite dividend payers, Target (TGT).

BMO Capital upgraded Target to outperform from perform. The sell-side analyst says Target is well positioned in this new age of post-pandemic shopping and will emerge in an even stronger position. This view coincides with the consensus of Wall Street analysts, analysts that see Target’s foray into omnichannel retail as a core strength.

The last major note issued from the sell-side community came from JP Morgan. According to them, Target is gaining market share despite headwinds to near-term growth. Those headwinds include limits on store traffic that are sure to impact net revenue in the  2nd quarter of the year.

"TGT is a core long-term holding given its ability to compete in the new world of omni-channel retailing and its opportunity to gain share over time," says JP Morgan analyst Christopher Horvers.

The Q1 Results Are Going To Be Strong

Based on the data I’m seeing, Target’s Q1 figures are going to be strong. The company reported that comps were up 30% in March due to pantry-loading activity. This represents a 50% increase in YOY grocery and sales of necessary home items offset by a 30% decline in apparel. This data is backed up by the March retail sales data which shows a 29% increase in YOY grocery sales.

The analysts are expecting positive results from Target in the 1st quarter, this year and next year. The current consensus for the Q1 period is EPS growth near 4.5%. As for the year, EPS growth will slow to an average near 4.25% but expand to 9.5% next year. And that is after a round of downward revisions.

Over the last 30 days, more than 80% of the analysts following the stock have lowered their revenue and/or EPS target. Because Target has shown such resilience in the face of the pandemic, I see a strong chance it will beat consensus for the quarter and the year.

Target, A King Of Dividend Payers

I like the dividend at Target not so much for the yield, about 2.5% at today’s prices, but for the stability. The yield is OK, it’s a little better than the broad-market average, but the stability lets me sleep soundly at night. With over 50 years of increases, a well-managed and low payout ratio, its position within the market, and growth in the forecast there is just no reason for fear. If there were, the company helped assuage it when it cut out its buyback plans for the year.

What can investors expect from the dividend this quarter? If the company lives up to its history, and there is no reason to think it won’t, investors can expect a dividend increase when Target reports earnings next month. There aren’t many S&P companies that can say that right now. The five-year CAGR is just over 6% so the increase should be in the range of $0.17. This would bring the annual payout to $2.81 and 2.6% of today’s share price. The increase may also attract new money to the stock which is never a bad thing.

The Technical Outlook: The Updraft Has Started

Target, like so many others caught up in the panic selling, saw its share plummet more than 20% from its February highs. The move brought price action down to levels not seen in over a year and bargain-hunting dividend investors were ready to scoop up the deal. Since then, shares of Target have been moving steadily higher and look like a major updraft has started. The indicators are both bullish in confirmation of the rebound and there is plenty of room for price action to move higher.

In the near-term, shares of Target may consolidate around the $108 level or even pull back a little bit. The $104 level looks like a good target for support to kick in if a pullback is to unfold. That level is consistent with the short-term EMA and a likely price point for investors looking to get into this stock. Longer-term, a move up to $116 is expected, if Target can surpass resistance at that level a move up to retest the all-time high is likely.