Underappreciated Dividend Stock at 35 Year Lows

There are good reasons to be skeptical about buying retailers these days. Theft is so rampant in certain cities that flagship stores are closing down. Inflation is a hidden tax on consumers hurting their pocketbooks. High interest rates are translating to even higher credit card interest rates, further hurting consumers’ wallets. Amid all the concerns, perhaps it’s best to look at another sector, or is it?

We discovered a company with a brand name that has impressed on a wide variety of key financial metrics whose price is at 35 years lows relative to its dividend payout, or in other words, its dividend is about attractive as it’s been in over three decades.

Key Points

• Target has over a half century of history paying dividends and is currently offering a yield that hasn’t been seen in 35 years.
• Sales have been sliding which is causing investors heartache and translating to a lower share price.
• For patient investors, the balance of tailwinds relative to headwinds likely favors the bulls now.

Don’t Skip Past a 4.12% Yield

The stock we’re talking about is Target, now paying a 4.12% yield. It’s no ordinary dividend-paying stock because it’s had a 52 year streak of issuing dividends to loyal shareholders. Better yet, the payout ratio of 59% suggests that there is ample room for management to keep paying shareholders; it’s not as if the company is incurring massive debt levels to keep income investors satisfied.

Target has a lot more going for it than just its yield though. For one, its return on invested capital sits at approximately the same level as Berkshire Hathaway, just north of 12%, about 20% higher than the average S&P 500 ROIC.

It’s also trading at a 14.8x Price-to-earnings multiple, a highly attractive level for a $49 billion enterprise with highly predictable earnings.

Is It Time To Buy Target?

If you pay attention to Wall Street analysts, buying Target now is a virtual slam dunk because it’s so heavily discounted relative to fair value. Of the 31 analysts covering the stock, the consensus estimate is for the share price to hit $145 per share within a year. To verify those projections, we ran a discounted cash flow forecast analysis and arrived at intrinsic value of $149 per share. Combine those estimates with the low P/E and high ROIC and the odds are Target will outperform bearish analysts projections over the next few years.

Yet another factor to consider is Target’s price-to-sales ratio that sits at just 0.5x, meaning that even though the company generates over $100 billion in sales it’s market cap is about half that amount.

With so much going for it, you might be wondering why the share price has been going down and the simple answer is that sales growth has been slowing. After a period of exuberance where online sales were growing rapidly, Target’s overall top line has stagnated in recent quarters and finally taken a turn for the worse, dropping 4.9% in the July report.

The concern among shareholders is that the trend of growth that topped out and U-turned will accelerate lower. If that does manifest, Target share price is likely to move further to the downside.

Final Thoughts

If you’re looking for a fast buck, Target may be a stock to skip past now but if you want to hold a brand name undervalued stock for the foreseeable future that pays a generous dividend, you’ll find it hard to beat it.

Paying a 4% plus dividend, and with a clear economic moat trading below the crucial 15x P/E ratio level, Target is a very enticing stock for value investors at this time.