Target’s Stumble Is A Chance To Buy A Dividend King

Over Eager Estimates Spark Massive Re-Valuation In Target

The estimates and expectations for Target’s (TGT) earnings were high. I’ll admit I was one of the bulls, just yesterday I pointed out the strength in consumer banking as an indicator of underlying strength in consumers and consumer discretionary stocks. Strength in JP Morgan (JPM) and Citigroup ( C )along with the rising tide of employment led me to think Target, Walmart (WMT), and other big retailers could outperform market expectations.

Today, Target reported its 2019 holiday sales and confirmed another theory I put forth. The idea that the consumer discretionary sector is riding high on expectations and expectations are easily dashed. Let me quote myself here…

“The worst thing about high expectations is they can be easily disappointed so there is more than a little risk. A round of bad reports and the ETF could sell-off by the end of the reporting cycle. The indicators are consistent with weakening markets which adds another element of risk, so I would be cautious with new entries until the earnings reports begin to come out. If the consumer companies beat consensus and begin to raise guidance we may see the XLY rally to new highs very soon.”

If Target's reality is closer to Lululemon than it is unlikely the Consumer Discretionary Sector (XLY) will rally to new highs very soon. More likely, the entire sector will undergo a re-valuation and set up the next buying opportunity. The outlook for sales and earnings growth is robust for consumer discretionary stocks in 2020, a pullback in prices now could be the precursor to new rallies and new all-time highs later in the year.

What Happened To Target’s Holiday Sales

Target reported comp-store sales for the two-month holiday period rose 1.4%. The 1.4% is a respectable number for such a large operator save for the fact analysts had been expecting 3.8%. What makes it worse is that some, like myself, gave reason to believe the company would outperform consensus.

The reason for the miss is simple, Target had some weaknesses in core-holiday segments that offset results. Electronics, Toys, and Home account for a third of all holiday sales and were among the poorest performers this year.

The news is not all bad, however, Target says it is maintaining the 4th quarter and full-year guidance despite the soft number. Strengths in other areas are expected to carry the company, most notably the digital sales AKA direct-to-consumer or eCommerce. Comparable digital sales rose 19% in the same period.

The Outlook Is Good For This Dividend King

Despite weak holiday sales, the outlook for this Dividend King is good. The company is expected to report double-digit sequential and YOY growth for the 4th quarter and maintain its momentum through 2020. The consensus for growth in 2020 is over 8% and supported by tailwinds, namely the labor market health and consumer strength.

Looking at the dividend, today’s news is meaningless other than its impact on yield which is positive. At today’s prices, the stock is yielding just over 2.11% and above the broad-market average. The bonus is Target’s status as a Dividend King, a stock having paid a dividend for more than 50 consecutive years, and the dividend health.

The company has raised the distribution for 51 years so there is a very high likelihood of future increases. Target not increasing the yield would be big news indeed. The payout ratio is very low at 40% and well within acceptable levels. At this level, Target could be expected to continue raising the dividend without earnings growth and we have earnings growth. Future increases are all but guaranteed.

The Technical Outlook

Target fell more than -8.0% in premarket action and continued the slide during the morning session. Shares were down -11.0% by late-morning and look like they could continue to decline. The indicators are bearish and showing strength, the MACD is convergent with the new low and stochastic is firing a bearish crossover. Together, the two indicators provide a strong sell signal but its duration is questionable.

Today’s fall in prices was sharp but it was not catastrophic in the technical sense. Price action fell to a level well above what I would call a firm support target and there is still room for it to fall. My target for support is near $114.75 and the previous highs. A touch to this level would close the gap which formed after the last earnings release and may spark an intense round of buying. Traders that missed out on Target’s last run are probably still waiting to get in.