Recent Buy

Mr. Market has been rather moody lately. One day he’s positively depressed; the next he’s ecstatic. And this moodiness is obviously seen in the volatility the stock market has displayed since the year began. Although the S&P 500 is down just over -4% YTD, it’s been a rather whipsaw journey there.

It’s a good thing I don’t worry about the valuation or trends of the broader stock market, and furthermore do not compare my results directly to the S&P 500. I’m free of such burdens, instead choosing to focus on individual high quality companies, and the quantitative fundamentals as well as qualitative aspects therein. As such, I’ve been hard pressed to pass up some of the attractive prices on certain, individual stocks over the last couple weeks.

As many of you regular readers are already aware, I get one large commission check once per month as my day job is a sales-oriented position and I’m paid on a commission-only basis. Well, that check hit my bank account today (Thursday) and I went shopping!

I purchased 20 shares of Target Corporation (TGT) on 2/6/14 for $55.93 per share.

Target is a retailer that was incorporated in 1902. They currently operate in two segments: U.S. Retail and Canadian. They own and operate 1,919 stores throughout the U.S. and Canada, as well as online retailing through Target.com.

Now, I’ve already averaged down on shares in Target once after my initial equity investment in the company at $66.50 per share back in mid-November by buying an additional stake at $62.50 per share just last month. So you can imagine how ecstatic I was when I realized I had the opportunity to increase my stake yet again for a much lower price.

Just like I love a good sale on groceries or gas, I love a good sale on stocks. Even better if it’s a stock I already own as I get the opportunity to reinvest at advantageous rates. If I already did the research and concluded a stock is worth $X, I’m more than happy to quickly review my analysis for errors and buy at less than $X if the reasoning is sound.

I’ve already discussed Target at length recently, so I’m going to try and not reiterate myself too much. Hence, I’ll be focusing on different aspects and newer developments in this article.

However, I do want to touch on one important point this time around. In the last six months shares in Target are down just over -22% over the last six months. Meanwhile, the S&P 500 is up a little over 4% over this same period. An underperformance of 26% over such a short time period is pretty interesting to me, and it’s something that gets my attention quite quickly.

Now looking at this situation further we can see that Target has ~632 million shares outstanding and the price of shares are down some $16.00 per share over the aforementioned time frame. That means that Target has lost a market cap of ~$10.1 billion over the last six months. Do you really think Target has lost the equivalent of over $10 billion worth of its business in just six months? Do you think shares in Target were overvalued by that much six months ago? Do you believe Target is going bankrupt? I believe none of these to be true, so I continue to increase my stake with what capital I have available.

Now, don’t get me wrong: Target is not without its troubles.

The data breach continues to dominate the headlines. We all know the story: Target had a massive data breach that affected 110 million customers – with personal data theft affecting 70 million and another 40 million realizing their credit card information was stolen. While this is an unfortunate incident, Target has been outstanding in communicating the loss immediately and effectively. They’ve continued to update customers through regular emails, and have even offered to provide customers with a year’s worth of a free credit monitoring service.

And I don’t doubt this will be a costly incident. They’re going to face claims in regards to fraudulent purchases using stolen information and they’ll have to change POS hardware and/or software depending on the market. But to further prevent future issues they’re going to roll out chipped REDcards six months early, to hopefully limit future data loss. However, to put this in perspective The TJX Companies’ (TJX) data breach involving 45 million customers’ credit card information back in 2007 reportedly cost the company $256 million. Even if Target spends double or triple that amount the company has been unfairly punished here.

Meanwhile, I actually see the lackluster Canadian expansion as a bigger problem for the company because this can have lasting effects on the company’s ability to expand in other international markets. However, I think many of the issues afflicting the company’s Canadian stores – prices higher than what Canadian shoppers expected, dirty stores, lack of merchandise availability – can be fixed. Target is a highly successful retailer that’s been around a long time, and I think they’ll eventually get this right.

The company’s substantial growth speaks for itself. Revenue has a compound annual growth rate of 4.78% over the last 10 years – with revenue rising from $48.1 billion in 2003 to $73.3 billion 2013. Earnings per share has a CAGR over this same time frame of 9.42%, up from $2.01 to $4.37. These growth rates are pretty impressive for a low-margin business such as retail. Furthermore, S&P Capital IQ predicts an 8% CAGR in EPS over the next three years.

The dividend growth has largely followed suit. The 10-year dividend growth rate stands at 21.4%, although I don’t expect this extremely robust rate to continue. Although, a dividend growth rate even half this rate would still make me a rather happy shareholder and allow Target to be a strong long-term investment. And with 46 years of dividend growth under its belt and a low payout ratio of just 46%, I expect dividend growth to continue for the foreseeable future. The entry yield on shares right now is 3.08%, which is near an all-time high.

The balance sheet is fair for Target, with a debt/equity ratio of 0.75 and an interest coverage ratio of 7.

The P/E ratio on TGT right now is 14.99, which is on par with its 5-year average; however, this is on lower-than-usual earnings, and I think as earnings normalize once we get past the data breach issue and Canadian operations improve the value in shares at today’s price will show itself.

I valued shares using a typical Dividend Discount Model analysis using a 10% discount rate and a 8% long-term growth rate (below TGT’s historical average) and this gives me a fair value on shares of just under $93.00. You could lower the growth rate to 7%, which is much lower than what TGT has historically delivered, and you’d get a fair value on shares of ~$60. Either way, I think a solid margin of safety exists here on TGT shares at today’s price.

This purchase adds $34.40 to my annual dividend income, based on the current quarterly dividend payout of $0.43 per share.

My portfolio now holds 44 positions. This is an increase since my last update. Although TGT was not a new investment, I did recently receive spin-off shares in ONE Gas Inc. (OGS) from my investment in Oneok, Inc. (OKE).

I’m going to include current analyst valuation opinions below, as I use these to concentrate my reasonable valuation estimate.

*Morningstar rates TGT as a 4/5 star value, with a fair value estimate of $64.00.
*S&P Capital IQ rates TGT as a 3/5 star Hold, with a fair value calculation of $63.00.

I’ll update my Freedom Fund in early March to reflect my recent addition.

Full Disclosure: Long TGT, OGS, OKE

What are you buying now? A fan of Target at today’s prices?

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Edit: Corrected software/hardware error.

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34 Comments

  1. Im mostly concerned about the Canadian expansion. The data breach will be forgotten soon enough but the struggling expansion could actually effect the company for the long term. I believe they’ll get things worked out but it might take a bit longer than expected. Good thing though is if the economy, jobs, improve they could see more people trading up to TGT from WMT. Like the but and its a great example of averaging down.

  2. My fingers are still a little bloody from trying to (twice) catch this falling knife. I liked Target in the 60’s so I guess I should love it in the mid 50’s. I will probably try to buy TGT and WMT in smaller amounts in my Sharebuilder account. It seems like all the retailers including KSS are getting hit hard right now. It kind of reminds me of what happened to the REITs last summer.

  3. I’m a fan of TGT at today’s prices and have been slowly adding. For the rest of this month I’m probably buying a little more KO and YORW. I would like a very large positions in both but this will probably take several months/years.

    I’m really lacking in the electric utility space, what do you think about ED and EMR? I might pick some up next month. If you could buy just a few electric utilities, what would they be? I’m looking for things that will be around 20-30 years from now, or have a good chance of being around. I know ED has paid dividends for over 100 years so that sounds promising!

  4. Way to get some stocks on sale. For what it’s worth, and it’s not much, I went into Target today and it was the emptiest I have ever, in four years, seen the store. I went to buy some sunglasses and they were nearly out of stock: nearly bare shelves. It probably means nothing and it’s anecdotal, of course. But it made me wonder whether they’re tightening the belt a little.

  5. I’ve been keeping my eye on Target – it’s getting harder and harder to not pull the trigger on a nice position. I agree that the company isn’t going anywhere and I do believe the fundamentals are strong. Thanks for the write up!

  6. DM,

    Thanks much for your analysis.

    Do you have any thoughts on the long term effect of online selling on Target? Will it be ready to compete if Amazon’s model becomes the dominant way for consumers to acquire their home goods?

  7. Temporary problems create great buying opportunities. I think you’re going to be very happy with this addition in the coming years. Go Target!

  8. Glad I’m not the only one who has seen an empty Target & wondering what the problem is. I was in Target here in Canada yesterday and out of three items I came to buy, they had one. The stores are bright but understocked and certainly not busy at all. I drove down the street to Walmart, got the other items & every cashier was busy. Target’s pricing has not lived up to their promotion and quite literally Walmart is kicking their butt, for now.

  9. Dividend Mom,

    I just seen your purchases. Great job there!

    You picked up some great names at very attractive prices. Your timing was great as far as deploying capital. Nice job!

    And, yes, let’s definitely keep churning those dividends. 🙂

    Take care.

  10. Pursuit,

    I agree with you. If they can’t get Canada right – a market very similar to our own – that doesn’t bode very well for their chances in other international markets that will offer bigger challenges. I’m disappointed by the expansion so far, but I’m confident they can straighten it out. It’ll be a situation to monitor.

    I’m done buying TGT for now even if it goes lower. I’m comfortable with my position size in TGT and would prefer to build up WMT to a similar-sized investment.

    Best wishes.

  11. Pipeline,

    The retailers have indeed been hit hard. But that’s fine by me. I’m not selling any shares, so lower prices simply means I can buy more with my limited capital. If you believe in the long-term story of many of these retailers then buying them after the big dip seems prudent.

    However, I don’t really see it as a falling knife. That term has always irked me. To me, that would be a stock that is falling because of significantly deteriorating fundamentals and will hurt you on the way down – aka a value trap. I never look at a high quality company like Target as a falling knife. I simply see opportunity. Would I have been better off not buying at $62.50 and loading up at $56? Absolutely, but I can’t predict the future. I like to say I can analyze a company, but I cannot analyze the stock market. The former involves accounting statements and nuances in the business’s future, whereas the latter involves trying to predict the emotions of countless people.

    Cheers!

  12. The Dividend Guy,

    Good question on the utilities. I’m not real big on utilities in general. That’s simply because many of them are capped on growth by regulation and geographical limitations. The benefits to them are that they have a monopolistic hold on local business because you have to use your local electric provider. However, that’s changing somewhat with the access to solar power. Many electric utilities (like ED) have anemic dividend growth rates, so you’d want to get an extremely high entry yield to compensate. I looked into SO a while ago and it seemed like a decent investment, but I just wonder about the growth with some of these names going forward. WEC was another one that seemed pretty solid, but the strong run over the last couple of years has dropped the yield significantly.

    By the way, EMR isn’t an electric utility. It’s a rather complex industrial company, and one that I’m invested in.

    Water utilities might not be a bad idea. Hard to get around a water supplier, and it’s a limited resource. Although, again, regulation and geography limit the growth.

    Cheers.

  13. DB40,

    Sucks to hear that. I suppose every store is a bit different, but if that story is usually bustling and now it’s dead that is certainly not a good sign of things to come. I’m surprised to hear about the bare shelves, however. The Target right up the road from me always has good stock on everything whenever I shop there, and it usually sees good traffic. Although, the Wal-Mart a little further up the road is always much busier. Tough to directly compare the two as the WM is a SuperCenter and the TGT is not.

    We’ll see what happens. I do hope they turn things around.

    Best wishes!

  14. Anonymous,

    Thanks for stopping by and providing that perspective. Your viewpoint echos most of what I’ve heard about the Canadian stores – high prices and understocked stores.

    Perhaps I’m overly confident they’ll turn it around, but prices and inventory are at the heart of what a retailer does, so you’d think this is an easy fix?

    Cheers.

  15. Matt,

    Glad you enjoyed the post!

    I agree. It’s tough not to pull the trigger here, although I’m done buying TGT for a while now. I never intended for it to become a major position for me, so I’m okay with it as an ancillary investment here. Besides, I’d like to increase my position in WMT to match what I have invested in Target.

    Take care!

  16. Anonymous,

    I don’t think online retailing is a zero-sum game, although I do think that Target has to keep building out Target.com to make sure it’s a robust platform with a shopping experience that consumers enjoy. You also have to wonder how long Amazon’s investors are going to put up with little/no profitability.

    Online retailing has been around for a while, and Amazon certainly isn’t new. Yet, Target continues to sell goods, and before the data breach and Canadian expansion, were doing very well. We’ll see, but I don’t think Amazon will kill all retailers. If anything, they may continue to kill the small guys thereby limiting the possible competition.

    Best wishes.

  17. Anonymous,

    I like WMT as well, and hope to invest a little more here soon to bring it on par with my investment in TGT. However, I think TGT is cheaper here after earnings have taken a (hopefully) temporary tumble.

    Best regards.

  18. RBD,

    Nice buy there. I’m confident we’ll do well with TGT here over the long haul. 🙂

    I’m also done with TGT for now. I don’t anticipate buying any more for quite a while, even if the price dips more.

    Cheers!

  19. Chris,

    I agree with you. Temporary problems do indeed create buying opportunities.

    As always, the difficulty lies in determining if the problems are temporary or not. I’m hoping (and betting) that these problems are temporary.

    And go Target! 🙂

    Take care!

  20. investingIdiot,

    Glad you enjoyed the post! Hope you found some value in it.

    I have courage here because I’m confident Target will continue to operate well over the long haul, but, of course, I could be wrong. That’s why I diversify. 🙂

    Hope you’re staying courageous out there!

    Best regards.

  21. TGT is a very good purchase!
    But in Germany, I have a tax deduction from 15%.
    And for 2014 I can´t take the money back from the Tax Office!

    Therefore I have to buy more companies from Germany or Great Britain,
    Then I don´t have a tax deduction.

    Last week I have bougt HCP.
    And next week I´ll buy GlaxoSmith Kline (GSK) from GB.

    At the end, one link to (I hope so) my new company car at 1.12.2014: Audi A6
    http://dividenden-sammler.de/2615/das-automobil-da-erwacht-das-kind-im-manne/

    Best regards
    D-S

  22. Hi Mantra,

    Thanks for the post, I’m feeling compelled to pull the trigger and buy TGT also.

    But personally I’m finding more interest in KO and PM at the current levels, so I’m increasing my overweight on them.

    Also I’ve been buying Enagás (ENG:spanish market), the monopolistic gas carrier in Spain, and one of the handful dividend growth companies there.

    Finally, I find interesting CVX and XOM again, but more study required.

    Best regards,

  23. D-S,

    I hear you on taxes. That’s always an important consideration when selecting investments. That’s one reason why I like companies based in the UK – we have a tax treaty with them.

    Good luck on the A6! Those are beautiful cars, and they don’t break much anymore.

    Best wishes.

  24. Manefla,

    I really like PM as well. That was one of my most recent purchases. I’m overweight on tobacco in general, so I’m just not going to buy any more major tobacco companies at all right now.

    KO is solid. I definitely wouldn’t mind buying more here. You can do much worse than buying KO at a fair price.

    The oilmajors are indeed interesting. I’ve got plenty of energy holdings, but I may add a little this month. We’ll see! 🙂

    Cheers.

  25. TGT is a solid buy, I’ve been averaging down myself. This month I added to my positions in WMT and BP. I hope to add more to my TGT position before the end of the month.

    Let’s hope that the market keeps giving us great buying opportunities.

  26. Spoonman,

    Nice buys there in WMT and BP. I hope to increase my WMT stake sooner rather than later and bring it on part with TGT. And BP has a great yield here.

    And, indeed, let’s hope Mr. Market continues the rather negative disposition. 🙂

    Take care!

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