In the midst of a market sell-off like this, I welcome any good news I can find.
And Target Corp.’s (NYSE: TGT) plan for its dividend going forward is a massive confidence boost for its investors.
It’s been an awful year for big-box retailers like Target.
The supply chain is still a mess, and inflation is driving up inventory prices while also making it harder for consumers to afford the merchandise already on shelves.
Shifting consumer tastes in the post-COVID world add another layer of complexity. Buying a fancy blender or a big-screen TV made a lot more sense when you were spending all your time at home. Now travel gear and new work clothes top everyone’s shopping lists.
All of this led Target to drop a bomb on investors last week when it announced it would slash inventory. The retailer is also marking down prices in its stores to clear the glut.
Investors dumped TGT shares on the news, accelerating its losses in an already miserable year for the retailer.
Target shares are now down almost 50% after peaking in November.
This isn’t an unusual move. Target has hiked its dividend for 51 consecutive years and counting.
I’m more impressed by the size of the dividend raise: A 20% increase is big, and it follows Target’s 32% dividend increase last year.
Why Target’s Dividend Hike Is Huge
There’s an old trader’s maxim that the safest dividend is the one that was just raised. To explain why, let’s start with the basics.
When a company pays a dividend, it’s parting with cold hard cash. For executives, that’s not always easy to come to terms with. Their natural impulse is always going to be to hoard that capital … just in case the economy cools, or the company has setbacks.
The last thing a board wants to do is reverse course and cut its dividend later. That’s embarrassing and sends a terrible message to investors.
That leaves one reason why the board of directors would hike the dividend: They expect to see a lot more cash coming in to replace what they’re paying out.
Even in a dumpster fire of a year, Target is confident enough about its future to announce a major increase in the dividend.
That’s saying something.
TGT Stock Power Rating
Target's dividend yield is about 2.9% at current prices. That’s not a killer yield, but you can expect it will continue to raise that payout at a much faster clip than the rate of inflation.
I’m going to stop short of recommending Target just yet, however. Our proprietary Stock Power Ratings system shows us why.
It rates a “Neutral” 43 within our system. Neutral stocks should perform in line with the overall market over the next 12 to 24 months.
Its momentum rating of just 30 is a big reason why I can’t back this stock right now. You can see it in the stock’s chart above. TGT is a proverbial “falling knife” right now, and trying to time the bottom is an exercise in futility.
Bottom line: That said, you’ll want to keep an eye on this one.
Target rates an excellent:
- 84 on our quality factor.
- 66 on value.
- And 62 on our growth factors.
This is a high-quality growth stock trading at a value price.
But be patient. When you see evidence of improved momentum for TGT (which should boost its overall score), consider making this one a long-term holding.
To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.