- Target is managing through an earnings recession.
- The retailer should be able to count on strong revenue, but it may not translate to earnings.
- Dividend investors may still find the company’s dividend appealing.
Long before the words “earnings recession” became part of the financial news conversation, Target (NYSE: TGT) was announcing expectations for an earnings decline. Sure enough, when the company delivered its earnings report in May, Target confirmed what many investors suspected. Earnings were being affected as the company continued to deal with the effects of inflation.
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TGT stock gapped down approximately 25% to $160 a share. And despite the stock rallying to around $!74 a share TGT stock is back down to around $!60 a share.
That shouldn’t be surprising. Retail spending is slowing as consumers put the brakes on discretionary spending. And since Target issued its earnings warning, Walmart (NYSE: WMT) also sounded the alarm for investors.
But the question that 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’ll lay out a case for owning TGT stock.
Target Investors Hope for a Soft Landing
Another phrase that is making its way into investor sentiment is the idea of a soft landing for the economy. The thinking is that the economy, largely due to the consumer, will be able to absorb higher interest rates without tipping the economy into a recession.
Here’s where I need to pivot (pun intended) and state that many investors and consumers already believe the economy is in recession. But this is the conversation that’s ongoing.
While I’m throwing out investing cliches, many investors are cautioned not to fight the Fed. However, I’ve tended to follow another one and that is to not underestimate the American consumer.
In this case, I don’t mean that the consumer will keep spending their way into oblivion. Although credit card use for everyday purchases is going higher.
No, what I mean is the consumer has a way of reigning in inflation long before rising interest rates make their way into the economy. Many consumers were already adjusting their budgets while the Fed was still calling inflation transitory. In my opinion, that means demand destruction will probably occur more swifly than many are imagining.
What Does Slowing Demand Mean for TGT Stock?
Target does exist in a sweet spot in the sense that it offers consumers a mix of both staple items as well as discretionary purchases. This explains the fact that the retailer continues to show year-over-year revenue growth.
Simply put, even as consumers may bypass some of the discretionary items in the store, they’ll still have a reason to shop at Target. And since Target took a leadership position in 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 Federal Reserve meeting plus at least one, if not two CPI reports. This data will help frame up what the holiday season and successive quarters may look like for TGT stock.
Long Live the King
Sorry, I couldn’t resist. But it does lead me to one reason that investors will want to hold on to their TGT shares. Target has now joined the exclusive ranks of Dividend Kings. These are companies that have increased their interest rates for at least 50 consecutive years.
The dividend yield of 2.65% may not seem overly impressive. However, as dividend investors realize the key is the payout. And currently, Target pays out $4.32 per share on an annualized basis.
With a payout ratio of around 40%, investors should prepare for slower dividend growth than the 7.3% average of the last three years. But with a payout that’s over $4 a share, Target has some goodwill baked in.
That’s why Target still looks like a solid option for long-term investors, but whether the dividend is enough to get you interested in the short-term is for you to decide.
