Target Corporation (TGT): An Attractively Valued Dividend Champion on Sale

In the past decade, the dividend payout ratio has increased from 11% in 2007 to 41% by 2016. The quadrupling in the dividend payout ratio explains the rapid growth in dividends per share. I believe that long-term growth in earnings per share will determine future dividend growth. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The return on equity has generally remained between 15% and 19% over the past decade, with the exception of the drop in 2014 when Canadian operations were losing money. Once Target earnings rebounded by 2016, this indicator went up to 24%. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, Target Corporation (NYSE:TGT) is selling for 13 times forward earnings and yields 3.30%. I took advantage of the drop last week in order to add a little to my position in this retailer. As I mentioned on Twitter, I believed that the press release didn’t seem to warrant a 9% decline. This was definitely driven by the animal spirits of fear, which is something I want to take advantage of. It is a no brainer that revenues will decrease, if you sell your pharmacy operations to CVS. On the other hand, it is possible that the stock price goes down from here. This is why I buy a little on the way down, in order to reduce the impact in case I am wrong in my assessment. As an investor, my goal is to reduce the impact of errors in trying to catch a falling knife. I believe that Target would be a solid holding for long-term investors, who are patient and do not get scared away easily. I would be more excited about Target, however, if it dropped further from here into the mid $50’s.

Full Disclosure: Long TGT and WMT