Target (TGT): A 3.4% Dividend Yield… But Is It a Buy?

Lately, there has been lots of talk amongst dividend growth investors about Target Corporation.  Over the past year, TGT has underperformed the S&P 500 by nearly 34%.  In a world where it is difficult to find value, TGT’s 12-month performance is enticing.  Add on the now 3.4% dividend yield, 46 years of dividend growth, and a household brand name and we’ve got ourselves a very tantalizing offer.

Target vs. S&P 500

Target’s woes are very widely known and can be traced back to two primary issues:

(1) Canada

Target moved towards expanding outside the United States, opening up 127 stores in Canada.  So far, it’s been nothing but a complete and total disaster.  One Canadian TV broadcaster described it as, “the biggest retail failure Canada has ever seen.”  Target’s Canadian adventure has been so badly botched that Target actually created a video specifically apologizing to Canadian customers.

They should also create one apologizing to shareholders.  The debacle has been very costly and is now clearly reflected in Target’s stock price.  While there are certainly signs that Target is starting to gain a little traction, reputation is an integral part of any business and bad first impressions are difficult to recover from.  Only time will tell whether Target can turn it around in Canada, but it was a very large investment that has – so far – not come close to paying off.

(2) Data Breach

40 million credit card numbers and 70 million addresses were leaked to hackers who installed malware on Target’s system.  More than 90 lawsuits have been filed against Target, who has already spent $61 million responding to the data breach.

Before investing in Target (or any company for that matter), you really should read through the company’s SEC filings.  Not to ruin the suspense, but Target reported some pretty interesting things to the SEC in their latest 10-K filing.  Target warned that the legal expenses resulting from lawsuits and government investigations could have a “material impact” on future earnings and/or the company’s reputation.  In addition, some expenses related to the breach have not been accounted for on Target’s balance sheet not because they are unlikely to occur, but because they are impossible to accurately estimate.  In other words, Target has some significant unplanned expenses on the horizon and they, nor anyone else, has any remote clue how large they will be.  Yikes!

Yeah, But Those Are Just One-Time Issues… Right?

As a result of the data breach and Canadian problems, Target’s CEO resigned.  In the interim, CFO John Mulligan has stepped into the CEO role.  The company has indicated that it will be looking outside the organization to fill the leadership void.  Looking outside means they don’t have much confidence in what’s inside, which is not a good sign for current or potential shareholders.

All companies go through a few isolated issues at some point in their lifetimes.  If Target were merely experiencing a few road bumps, it might make sense for long-term investors to buy in and ride through the bumpiness.  However, Target’s woes extend beyond these isolated issues.

Retail companies are very low net margin businesses, with the industry average at a paltry 4.4%.  These businesses are under tremendous pricing pressure as consumers dance around different stores and online retailers to quickly and easily find the best price for the same goods.  As CEO John Mulligan said in Target’s 2014 Q1 conference call, “We ramped up the intensity of our deals in the first quarter to get guests back into our stores and this decision was reflected both in better sales traffic and a lower gross margin rate.”  Retail is a difficult business to build a wide economic moat, which is why it generally makes for a poor investment.

Despite the difficulties in the retail environment, Wal-Mart’s operating income has grown by 3.5% since 2010.  That’s certainly not going to blow the stocks off of anyone, but it is much more impressive than Target, whose operating income has shrunk by 2.7% over the same time period.


Despite the lackluster historical record, analysts seem to be rather optimistic about Target’s turnaround.  According to Yahoo! Finance, the consensus 5-year growth rate for Target is 12.9%.

I don’t know who exactly is making those projections, but I sure would like to try what their smoking.  Profitability metrics don’t provide much more to get excited about than the lackluster growth history.  Target’s Return on Equity (ROE) multiplied by its retention ratio (what it doesn’t pay out in a dividend) is 4.9%.  The same calculation using Return on Invested Capital (ROIC) is a slightly more impressive 6.3%.  Cash Return on Invested Capital (CROIC), which use’s Warren Buffett’s “owner’s earnings” as a substitute for reported earnings, is a paltry 4.1%.  Without some sort of miraculous revenue growth or additional investment, it seems unlikely that Target can grow much faster than 6.3% over the long run.

Despite my hesitations about analyst’s estimates, let’s just assume that Target can actually grow at 12.9% over the next 5 years.  Using that growth rate discounted at 11%, Target’s fair value comes out to $63.20 using the median of six different models (dividend discount model, discounted cash flow model, earnings power valuation, Katsenelson’s absolute PE model, Graham model, and EV/EBIT valuation).  Substituting the analyst’s 12.9% growth rate for the much more conservative 6.3%, Target’s median valuation falls to $46.95.

Many dividend investors point to Target’s 3.4% yield as one of their primary factors for purchase.  In an environment where the 30-year U.S. Treasury bond is yielding less than Target’s dividend yield, that’s a pretty impressive argument for buying TGT.  However, it is worth noting that Target’s yield is benefited by a rather high dividend payout ratio of 56%.  By comparison, Wal-Mart’s payout ratio is 37%.  If Wal-Mart were to increase their payout ratio to match Target’s, they would have a dividend yield of 3.8%.


Perhaps consumers will soon forgive Target of it’s woes and their stores will catch on in Canada.  If that happens, Canada will likely be a good buy from its current prices.  However, as Ben Graham said, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.  Operations not meeting these requirements are speculative.”  Betting that Target will return to its former glory (if that even existed in the first place), sounds an awful lot like speculation to me.  At current price levels, I would encourage investors to be wary of investing in Target without a much larger margin of safety.

Dividend Growth Investing Watchlist: Cisco Systems (CSCO)

Today, Cisco Systems (CSCO)we’re going to talk about a company that I’m adding to my Dividend Growth Investing Watchlist for a potential future buy.  I’m going to go through the things I analyze when adding a position to my portfolio.  Since this is the first time I’ve done this, I will be a bit more descriptive than in future posts – so this will be a long post, but I decided it would be better to show more information than to omit pieces of the story.

Cisco Systems (CSCO) designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate (Google Finance).


Warren Buffett has famously made his fortune buying companies that possess what he calls “economic moats”.  He thinks of companies like a castle.  The bigger the castle (profits), the more competitors that are going to come try to break in and steal away market share.  If the company possesses some competitive advantage that prevents or slows down the competition, he would say that company has a moat.  The wider the moat and the more crocodiles that inhabit it, the longer that company will be able to enjoy its market share and the high profits that go along with it.

There are several financial ratios that help us determine whether or not a company possesses an economic moat.  As we move along here, keep in mind that there is more to determining whether a company has an economic moat than by flipping through its financial statements.  These numbers just indicate where to look and do not definitively mean that a company does (or does not) possess an economic moat.  They do help us maintain objectivity in our analysis and provide a base for further exploration and thought. Read more

Should You Always Be Fully Invested?

MythbustingIf you read around the internet, you’ll find that the vast majority of people will advise investors to have 100% of their money invested in either stocks or bonds all of the time. Should you always be fully invested?

If you are investing in individual businesses rather than a broad-market ETF, it doesn’t make sense for you to always be fully invested just for the sake of being fully invested. It is much better to sit in cash and wait patiently for an opportunity than to tie up capital earning sub-par returns.

Don’t just take my word for it. The world’s greatest investor himself advocates patience rather than action. Warren Buffet says,

“Your default position should always be short-term instruments. And whenever you see anything intelligent to do, you should do it.”

To illustrate, let’s compare the investment results of two investors. Both investors plan to invest $5,000 per year over the next 20 years. The only difference is that Investor A is fully invested in the stock market 100% of the time. Investor B, on the other hand, decides that they will only purchase companies at prices that will deliver long-term returns of 12%. Read more

How To Make More Money Without Working For It

No Work!There are two ways to make money in life. You can either:

#1 work for it yourself


#2 let someone (or something) else do the work for you

Most people focus their attention on #1. Growing up, we’re taught that the only way to earn income is by getting a job and working. If you want more money, you have to work more hours or move into a higher-paying job.

The problem is that you only have a limited amount of hours in the day. All those extra hours on the job mean less hours doing the things you’d rather be doing and less time with the people you love.

If only there was a way to duplicate yourself…

You may not be able to send two of you to work on Monday, but you can use your money to work for you. And, no offense, but your money can work a lot harder than you can! Read more…

What Is Common Stock?

Bob's Barber Shop

You’ve heard people talk about investing in stocks and heard about “the market” on the news or radio, but you don’t really understand what a “stock” is. Don’t worry. Most people don’t.

Even though people like to talk about their stock portfolios over at the coffee pot on Monday morning, most of them don’t understand what a common stock is or what investing in them really means. For most people, the stock market is like a glorified casino that they put money in and hope that they get something in return.

It’s really unfortunate that more people don’t have a better understanding of what stocks are. Even a basic knowledge of the stock market can help you build a cash-producing investment fortress that eliminates your need to ever work again.

If you want to get started on this magical road to financial independence, you need to first understand the different types of investments. The (arguably) most important investment type are common stocks. Read more…

4 Financial Benefits of Outrageous Optimism

LEGO MovieIf you haven’t seen the Lego Movie yet, you really should. It’s one of the most hilarious and clever movies I’ve ever seen. The theme song for the movie is fantastic. Just in case you haven’t seen it, check out this short clip.

If you’re too busy to watch the 30 second video, the blissfully optimistic main character boldly proclaims that “Everything Is Awesome!” – including pay $37 for a cup of coffee. Life in Lego land might be pretty dang good, but what about the real world?!?!

If you asked the average American how they felt about the current state of our country/economy/world – odds are they would be pretty pessimistic. If you prodded further into their negative outlook, they might say things like…

“We’re all overworked and overpaid.”
“The rich just keep getting richer at the expense of everyone else.”
“The national debt is going to crash the economy.”
“The Fed keeps printing money, which is going to lead to hyperinflation and crash the whole system.”

If you listen to that all day long from your co-workers and/or news broadcasters, it’s pretty easy to feel like life is pretty crappy. But the reality is that life is absolutely 100% freaking awesome. Read more…

What Is An Investment?

What Is An Investment?The idea of investing is really very simple. If you have a savings account at your local bank, you have been investing at some level for a number of years.

“Investing” simply means to postpone spending money today with the expectation that you will make a profit at some point in the future.

The definition of an investment is fairly straightforward. Most people get overwhelmed by the various different types of investments, what they do, and why you might want to use them. Read more…

3 Investing Costs That Are Destroying Your Portfolio

Investment ExpensesIf you asked the average investor what he or she paid in total dollars or percentage points what their total investment costs are in a given year, their answer will most likely range between “I don’t know” and “I think something like [insert something way less than what they actually pay].”

Investors have no remote clue what they’re really paying for their investing accounts and that really chaps my hind parts. Today we’re going to change all that and save you from turning into another investor oblivious to the absolute rampage that random expenses are having on your portfolio.

These little monsters get overlooked because they just seem so insignificant. $10 here. 1% there. A few tenths of a percent here. No big deal, right? When the market returns an average of 9% per year, who cares! I’m getting rich!!!!

With investing… ignorance is bliss. Unfortunately, ignorance is also absurdly expensive. Read more…

How to Calculate Expected Return of the Overall Stock Market

How to Calculate Stock Market ReturnsAll investors wrestle with the same question: Should I invest in stocks? Is the stock market too expensive? Is it a good buy right now?

Most investors have no idea how to value the stock market. It’s all about price. If the stock market is at an all-time high, it must be a terrible time to invest. If it’s sinking lower, it’s probably a good time to sell. If the economists are predicting a recession, you better hide your money under the mattress!

Today, I’m going to show you how to calculate expected return of the overall stock market for the next 10 years. Once you know how to calculate expected returns, you will be able to answer questions like… Read more…

Which Investment Account Is Best for Me?

401(k) PlansWhere you put your investment assets is just as important, if not more important, than your actual choice of investments. Taxes have a pretty substantial impact on long-term investment returns, so it’s important to develop a plan that is as tax-efficient as possible.

The guide below will help walk you through the kind of factors that are important to determining which investment accounts you should open and in what order. Read more…