Second quarter GDP growth data in United States has once again shows that personal consumption expenditure continues to be the key GDP growth driver. In the coming years, U.S. will remain a consumption-driven economy even if consumption trend remains volatile. This view also implies that discretionary and non-discretionary consumption related stocks will continue to do well.
Among general merchandise retailer, I consider Target Corporation (TGT, Financial) as a good investment for the medium to long-term. For YTD15, Target stock has moved higher by 4.0% as compared to negative returns of 17% for Walmart (WMT, Financial) and 2.5% returns for Costco Wholesale Corporation (COST, Financial). I also like Walmart as a dividend stock, but Target might continue to outperform Walmart from stock upside perspective.
One of the developments that I recently liked about Target is the company’s agreement to sell its pharmacy and clinic businesses for approximately $1.9 billion to CVS Healthcare. The company expects after-tax net proceeds of $1.2 billion from the transaction and I see the following benefits –
- The agreement to sell will allow Target to focus on its core business, and I believe that this is a positive step from a long-term perspective in a business environment that is more challenging.
- The net proceeds of $1.2 billion will help target make investments in the core business and will also help the company accelerate its share repurchase program, which is value creating. In June 2015, Target announced acceleration of share repurchase program from $5 billion to $10 billion.
I am also of the opinion that Target is a good stock to consider just before the second-quarter results. For the first quarter of 2015, the company’s comparable sales increased by 2.3% as compared to the first quarter of 2014. Investors will recall that U.S. 1Q15 GDP was weak and retail sales were also weak. However, 2Q15 GDP has been strong and has been supported by strong retail sales growth. Therefore, I expect Target to report strong comparable store sales increase and this will take the stock higher.
I also believe that several new initiatives might work for Target in the next few years. In particular, the company has launched CityTarget and TargetExpress in 14 locations across the country. The objective of these stores is to create a more locally-relevant experience for guests in urban areas. While full-size stores will still open wherever there is an opportunity, this initiative should positively impact the company’s growth.
Another factor that is positive about Target Corporation and is common to stocks like Target and Walmart is the continued growth in dividends. Target is certainly not a high revenue growth stock, but the dividends will attract investors. From quarterly dividend of $0.25 per share in 1Q11, the company’s dividend has surged to $0.52 per share by 1Q15. Further, the second quarter dividend has been increased to $0.56 per share. A dividend yield of 2.8% is attractive considering the stability and considering the fact that even 10-year Treasury bonds yield 2.2%.
In terms of relative valuation, Target is trading at a forward (January 2017) PE of 15.7 as compared to Walmart, which is trading at a forward PE of 14.3. Therefore, there is not much to choose in terms of valuation and I mentioned earlier that both these companies are good dividend stocks. However, when it comes to revenue growth, comparable store sales growth and EPS growth, Target is likely to have an edge over Walmart.
