10 Year Performance Analysis
Let’s take a closer look at the company’s business and investment history to get a better feel for how the security has interacted with Target’s operating performance. Here’s a look at some important metrics moving from fiscal year 2006 through 2015:
On the top line Target Corporation (NYSE:TGT) turned in reasonable, but not exceptional results. Total sales went from about $59 billion to $74 billion over the nine-year stretch. If the profit margin remained the same during this period, you would see company-wide earnings growth that was in-line with total sales growth. However, this was not the case.
Target’s profit margin went from 4.7% to 4%, resulting in company-wide earnings growth of just 0.7% annually. What’s interesting is that this does not simultaneously imply that a shareholder’s earnings claim also grew this slowly. Instead, Target has a long-standing share buyback program that allowed 0.7% company-wide earnings growth turn into 4.3% earnings-per-share growth.
Target’s common shares outstanding went from 860 million to closer to 600 million at the end of last year. Expressed differently, for every 10 shareholders that existed in 2006, just 7 remain today – Target bought out 3 out of every 10 shareholders on your behalf.
The earnings multiple went from around 18 down to 15, resulting in slower share price growth. Finally, you have the dividend component, which grew at a very impressive rate of 20% per annum. This superb growth was possible for two reasons: underlying profit growth and an increase in the payout ratio.
Target could have elected to keep its payout ratio at 13% and grow the dividend by an average compound rate of 4.3% per year. Instead, the company elected to significantly increase its return to shareholders, resulting in a payout ratio that approached 50%.
Despite the robust dividend growth, the actual contribution of this cash payout to the bottom line was solid but not exceptional. This is because the starting dividend yield back in 2006 was just 0.7%. If you put the components together your come to a total annualized gain of about 4.3%. As a point of reference, that’s the sort of thing that would turn a $10,000 starting investment into $15,000 or so after nine years.
The above information is useful in two ways. First, it gives you a historical context of why a certain security may have performed as it did. Target’s shareholder return was aided by an exceptional share repurchase program and robust dividend growth rate, but hindered by a decline in the profit margin and earnings multiple.
Just as important is the idea that this sort of information can provide a framework for thinking about the future. You have a historical context to go along with the knowledge of how key components interact. Here’s a hypothetical set of assumptions to demonstrate what I mean, and give you a baseline view of what the security may look like today:
The middle column provides the same historical information as depicted above for reference. The right-hand column provides a set of hypothetical assumptions for the next decade. You’re not going to get this perfect. Instead, it’s about creating a baseline and thinking about the long-term prospects of the business and security.
On the top line 2% annual revenue growth is used – indicating total sales of about $90 billion 10 years from now. The future profit margin is presumed to be about 4.5%; higher than last year’s mark, but lower than what analysts are anticipating in the coming years. To be sure this sort of thing can be pressured by competition from Amazon.com, Inc. (NASDAQ:AMZN) and other formidable firms, but the idea is to come up with a starting point.