The dividend yield ̶ at 4.6% ̶ is tempting. It’s even more tempting when you consider the company behind the dividend yield.
Target (NYSE: TGT) could readily be slotted into the dividend-aristocrat category.
The merchandising giant has raised the Target dividend annually for the past 49 years.
[ad#Google Adsense 336×280-IA]What’s more, it has hardly been parsimonious doling out the increases. Over the past 10 years, Target has raised its dividend at a 17.5% average annual rate.
But I’ll pass, nonetheless, and here’s why: Caldor, Service Merchandise, Strawbridge’s, Gaylords, Gimbels, Montgomery Wards, W.T. Grant, F.W. Woolworth.
Any of these names ring a bell?
Probably not, but all were large merchandise retailers; all were chain stores with a commanding presence; all went bankrupt.
Modernity offers additional examples of the perils of investing in large, struggling retailers.
Macy’s (NYSE: M) sales have stagnated since 2013; earnings have drifted lower. Macy’s image is that of an upper-scale retailer ̶ with its Macy’s and Bloomingdale brands. Fewer people want to pay upper-scale prices for upper-scale merchandise these days. Macy’s has responded by competing on price. We’ve subsequently found that even fewer investors believe an upper-scale retailer competing on price is a sustainable business model. Macy shares have lost 61% of their value over the past two years.
The travails of Sears Holdings (NASDAQ: SHLD) and JC Penney (NYSE: JCP) have garnered even more headlines then Macy’s. After all, attempting to shrink yourself into relevance and sustained profitability by closing hundreds of stores is a provocative story.
Shrink as they may, the fundamental problem for Sears and Penney remains largely unchanged: Why impart loyalty to a retailer selling apparel found everywhere at prices found everywhere? Despite being centenarian retailers, with iconic brands, Sears and Penney have lost 85% of their equity value over the past five years.
Will Target suffer a similar fate?
A decade ago, Target was riding high on a funky faux-chic marketing campaign. (You might remember customers fashionably pronouncing Target with the French accent Targét.) Target was selling offbeat, colorful apparel that appealed to younger consumers.
The problem is that younger consumers are also fickle consumers. The funky-faux-chic well long ago ran dry. A replacement well has yet been pumped.
Target CEO Brian Cornell acknowledged at a recent meeting with analysts that his company faces numerous difficulties. Nevertheless, Cornell believes that “investments in a smart network of physical and digital assets” and investments “in lower gross margins to ensure [the company is] clearly and competitively priced every day” will ignite and propel growth.
Color me skeptical. I shop at Target and its primary competitor Wal-Mart Stores (NYSE: WMT), and Wal-Mart continually offers the superior shopping experience. Target and Wal-Mart sell similar apparel. Wal-Mart sells a wider variety of the similar apparel. What’s more, everything at Wal-Mart is generally lower priced.
Inventory management is one difficulty Cornell neglected to address with the analysts. Advantage Wal-Mart, which runs circles around Target. I frequently find Target shelves either sparsely stocked or even bare. Rarely do I find sparsely stocked or bare shelves at Wal-Mart.
If only Target’s turnaround tale were more compelling, because a sliding retailer can offer a contrarian trade if the turnaround story is sufficiently compelling.
For example, Kmart of two decades ago was in a similar predicament as Target. Kmart had reported years of declining profits. The CEO was ousted and a retailing superstar, Floyd Hall (a former Target executive), was hired to improve Kmart fortunes. The Hall hire resuscitated investor enthusiasm for Kmart’s stock. Kmart’s share priced climbed.
I was one of the resuscitated investors. I bought Kmart shares on the Hall announcement. Two years later, I sold Kmart shares for a slight profit. My enthusiasm after two years was waning, as were Kmart’s fortunes.
Yes, Hall had improved Kmart’s finances. Despite his best efforts, Kmart remained a far inferior retailer compared to Wal-Mart. Hall resigned in 2000. We know what has become of Kmart since.
Target Dividend and a Turnaround Story
Target presented a similar contrarian-trade opportunity in spring 2014. Target’s share price was reeling under a massive credit-card breach and a disastrously expensive foray into Canada the year before.
But Target’s turnaround story ̶ like Kmart’s two decades ago ̶ was compelling: Target fired its CEO and hired a new CEO with a superlative resume. Target would jettison its Canadian operations, fortify credit-card security, and subdue spiraling costs. Target would raise its annual dividend 24%
I was compelled, so I recommended Target shares to High Yield Wealth readers. A year later, Target shares were trading 35% higher.
I then recommended High Yield Wealth readers sell their Target shares. The compelling story was at its denouement. The compelling story was fully reflected in Target’s share price, even if lackluster revenue growth wasn’t.
As for Target today, I read a prosaic turnaround story compared to the compelling story of three years ago. Yes, Target executives want their company to be more price-competitive and the shopping experience more enthralling, but what retailer doesn’t?
Without a compelling story, I see no reason to buy Target stock. And if a compelling story fails to materialize, I see no reason for Target.
— Steve Mauzy
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Source: Wyatt Investment Research