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Target Stock: After 32% Plunge, Should It Still Be Part Of Your Income Portfolio?

By Investing.com (Haris Anwar/Investing.com)Stock MarketsJun 09, 2022 04:13PM ET
www.investing.com/analysis/target-stock-after-32-plunge-should-it-still-be-part-of-your-income-portfolio-200625507
Target Stock: After 32% Plunge, Should It Still Be Part Of Your Income Portfolio?
By Investing.com (Haris Anwar/Investing.com)   |  Jun 09, 2022 04:13PM ET
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  • Target is the worst performer among big-box retailers this year
  • The rapidly worsening outlook underscores Target's struggle to adjust to unexpected shifts in demand amid soaring inflation
  • Despite short-term inventory challenges, Target continues to remain a solid dividend pick for income investors
  • If you’re interested in upgrading your search for new investing ideas, check out InvestingPro+

After producing remarkable gains during the pandemic, one of the US's largest retailers, Target (NYSE:TGT), has been experiencing a sudden and steep reversal in its fortunes. Shares of the Minneapolis, Minnesota-based discount department store are down 32% this year, the worst performance among big-box retailers.

The stock closed Wednesday at $156.70, hovering around its lowest level since Nov. 2021.

TGT Weekly Chart
TGT Weekly Chart

The bearish spell comes after the retail giant reported worse-than-expect first-quarter earnings last month and warned investors about even more significant margin cuts in the months ahead. Markets saw the news as a warning of broad US recession risks, triggering the stock's biggest one-day plunge since 1987.

During the pandemic, Target and other retailers benefited from rising sales of higher-margin goods such as kitchen appliances, television sets, and furniture. This trend helped push TGT shares to a 180% bull run since the March 2020 crash.

But as consumers shifted buying patterns due to relentless inflation, the retailer has been experiencing lower-than-expected sales. As a result, inventories have been piling up, augmenting costs and further slashing margins.

Recently, Target announced yet another cut on its profit outlook—the second in three weeks—blaming soaring merchandise stockpiles and "unusually high transportation and fuel costs." According to the new guidance, Target will now make a 2% operating profit from sales this quarter. On May 18, the company had projected the metric would be around 5.3%.

Bank of America yesterday downgraded Target shares to neutral from buy, citing the retailer's significant level of discretionary inventories, which does not justify its current high valuation. The firm also slashed its price target on the stock to $165 from $235.

Target has a higher relative exposure to discretionary categories than other big-box-retail peers. General merchandise comprised more than half of Target sales in 2021, while it made up about 32% of Walmart's (NYSE:WMT) US sales, Bank of America noted.

Long-Term Outlook

However, in a recent interview with CNBC, Target's Chief Executive Officer Brian Cornell reiterated his confidence in earning operating margins of 8% in the long run—even as the retailer abandoned that goal for this year. He also said to expect revenue growth in the low to mid-single digits for the full year and to maintain or gain market share in 2022.

Furthermore, Target has been using its stores more as mini distribution centers for its booming digital business to fulfill online orders.

That move comes from CEO Cornell's efforts to make its retail outlets more attractive. He spearheaded the remodeling of hundreds of stores, introduced many affordable fashion brands, and bolstered the retailer's e-commerce offerings.

There is no doubt that Target has suddenly found itself in a different operating environment than it experienced during the pandemic. But this short-term challenge doesn't mean the retailer has lost its appeal to income investors.

Income Appeal

When picking dividend-paying stocks, the biggest concern to address is whether the company can produce strong cash flows in both good and bad times. Target has an excellent track record on this front.

The company has steadily increased its dividend every year for the last 50 years, a period that covers crises such as the dot-com collapse of the early 2000s, the financial crash of 2008-2009, and the COVID-19 pandemic. While delivering cash to investors each quarter, the discount store has also maintained a very conservative payout ratio of about 30%, showing more cash-distribution runway.

In June last year, Target announced a whopping 32% hike in its payout, scaling its dividend to $0.9 a share quarterly with an annual yield of 2.3%

Bottom Line

Despite its short-term challenges, Target continues to remain one of the best retail stocks to own due to its solid income potential and its ability to rebound quickly. The current weakness provides an attractive entry point to long-term investors.

***

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Target Stock: After 32% Plunge, Should It Still Be Part Of Your Income Portfolio?
 

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Target Stock: After 32% Plunge, Should It Still Be Part Of Your Income Portfolio?

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Comments (6)
Franc Fil
Franc Fil Jun 10, 2022 1:54AM ET
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I bought TGT after the data breach years ago and sold after a couple of years and a nice run. It's a good store and company.
Art Carrano
Art Carrano Jun 09, 2022 5:22PM ET
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Wouldn't touch it for a 2.3 divvie. Stock price is going to drop a lot more.
Dominic Mazoch
Dominic Mazoch Jun 09, 2022 3:52PM ET
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Been IN a Target recently. Used to, once you figured out one Target, you got all of them figured out in terms of layout. Now within 5 years they have redone their stores TWICE. Big perfume for women. Fewer overall items. They could have done the internet stuff without a store redo.BTW, do these stores actually ask the customers, you know, the ones who spend money in your stores and help make a profit, about the conditions in and produced in their stores?
Mark McMillan
Mark McMillan Jun 09, 2022 2:23PM ET
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definitely. I added quite a bunch at these low levels. They are smart and are already working on remedying their inventory and Christmas will be here before you know it. Easy money.
Dominic Mazoch
Dominic Mazoch Jun 09, 2022 2:23PM ET
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The easy money is going into the fuel tanks
Joseph Obrzut
jzut Jun 09, 2022 1:13PM ET
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I own 25 WMT @ $60. I never owned TGT. but when I see a drop in that magnitude I nibbled.and added a very small amount to WMT. It's like March of 2020 down 30% in 35 days I bought many stocks I didn't already own. I told my friends BUY when we started to come off the bottom but no they said we're all gonna die. :)
Mihai Doinea
Hermes78 Jun 09, 2022 2:25AM ET
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Worth considering
 
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