- Target is struggling through an earnings recession.
- The retailer must be able to count on a strong turnover, but this must not translate into profit.
- Dividend investors may still find the company’s dividend attractive.
Long before the words “earnings recession” became part of the financial news talk, Target (NYSE: TGT) announced a drop in profits. Sure enough, when the company released its earnings report in May, Target confirmed what many investors suspected. Earnings were impacted as the company continued to absorb the effects of inflation.
TGT shares fell about 25% to $160 a share. And despite the stock’s rise to about $!74 a share, TGT’s stock has fallen back to about $!60 a share.
That should not come as a surprise. Retail spending is declining as consumers put a brake on discretionary spending. And since Target issued its profit warning, walmart (NYSE: WMT) also sounded the alarm for investors.
But the question investors are trying to figure out is whether Target is a good stock to hold during this downturn in the market. In this article, I will outline a case for owning TGT stock.
Target investors hope for a soft landing
Another expression making its way into investor sentiment is the idea of a soft landing for the economy. The thinking is that, thanks in large part to consumers, the economy will be able to absorb higher interest rates without sending the economy into recession.
This is where I have to turn (pun intended) and state that many investors and consumers already believe the economy is in recession. But this is the conversation going on.
As I throw out investment cliches, many investors are being warned not to fight the Fed. However, I tend to follow another and that is not to underestimate the American consumer.
In this case, I don’t mean that the consumer will continue to spend their way into oblivion. Although the use of credit cards for everyday purchases is increasing.
No, what I mean is that the consumer has a way of controlling inflation long before rising interest rates make their way into the economy. Many consumers were already adjusting their budgets while the Fed still called inflation temporary. In my view, this means that demand destruction is likely to happen faster than many imagine.
What does slowing demand for TGT shares mean?
Target exists in a good place in that it offers consumers a mix of both basic items and discretionary purchases. This explains the fact that the retailer continues to show year-over-year sales growth.
Simply put, even if consumers can bypass some of the in-store discretionary items, they still have a reason to shop at Target. And since Target has been at the forefront of the omnichannel retail movement, the company is well positioned to meet consumers wherever their shopping habits take them.
By the time Target delivers its next earnings report, we’ll have another meeting of the Federal Reserve plus at least one, if not two CPI reports. This data helps determine what the holiday season and consecutive quarters may look like for TGT stocks.
Long live the king
I’m sorry, I could not help myself. But it does lead me to one reason why investors want to keep their TGT shares. Target has now joined the exclusive ranks of Dividend Kings. These are companies that have raised their interest rates for at least 50 consecutive years.
The dividend yield of 2.65% may not seem too impressive. However, as dividend investors realize that the key is the payout. And currently Target pays $4.32 per share on an annualized basis.
With a payout ratio of around 40%, investors should prepare for a slower dividend growth than the average of 7.3% over the past three years. But with a payout of over $4 a share, Target has some goodwill ingrained.
That’s why Target still seems like a solid option for long-term investors, but whether the dividend is enough to interest you in the short term is up to you to decide.