Despite the issues that Target experienced with its Canadian expansion in 2013-2015, I think that the company may have an opportunity to expand internationally. This is a driver which could propel earnings per share forward for the next 20 years. It has to be executed better than the Canadian store fiasco however.
Another driver for future growth could be the CityTarget stores, which are smaller, but provide the option to locate in densely populated areas. Those stores could have better productivity due to higher potential traffic and higher inventory turnover because of that.
One risk that may or may not be overblown is the competition from the likes of Amazon.com. When you have a competitor that sells at cost, bundles their sales service with other complementary products for a portion of customers, and whose customers do not pay sales taxes in most states, you are at a disadvantage. That being said, it is highly unlikely that retailers like Target will be driven away from online competitors. I know that it is very fashionable to forecast the demise of the traditional brick and mortar retailer today; I do not subscribe to the popular opinion of the day. It is very likely that Target will keep expanding its online presence, and offer to consumers a service which Amazon does not offer today – the online to store shipment method. I also believe that not everything is worth purchasing online, nor are online sales a good venue to do convenience shopping.
When a customer gets to a store for one thing at a physical location, they are very likely to buy something else on their journey throughout the store. It makes sense to purchase items right away, rather than wait for days or weeks for them to arrive. Some items are much better to personally try and touch, rather than have someone else deliver them for you. The value of repeatability and those customers who do their weekly/monthly visits to the Target stores is a very powerful force for Target as well. That being said, Target is working on expanding its online presence, which would actually be good for the business overall. However, it may result in near term pressure on margins and profits. So just because Target has a higher amount of online sales growth, and invests billions to accomplish that, there is no guarantee that this investment will pay off. In fact, this investment in the online sales channel will depress margins and profits in the near term.
The annual dividend payment has increased by 20.50% per year over the past decade, which is much higher than the growth in EPS. This was achieved mainly because the company decided to pay a higher portion of earnings to shareholders in the form of dividends. Future growth in dividends will be much lower than that however, and will be limited by the growth in earnings per share in the future. Given the lack of earnings growth over the past decade, and competitive pressures in the retail industry, I would expect a sluggish dividend growth going forward.
A 20% growth in distributions translates into the dividend payment doubling every three and a half years on average. If we check the dividend history, going as far back as 1986, we can see that Target has managed to double dividends almost every six years on average.
In the past decade, the dividend payout ratio has increased from 13.20% in 2008 to 50.70% by 2016. The quadrupling in the dividend payout ratio explains the rapid growth in dividends per share. I believe that long-term growth in earnings per share will determine future dividend growth. A lower payout is always a plus, since it leaves room for consistent dividend growth, minimizing the impact of short-term fluctuations in earnings.
The return on equity has generally remained between 15% and 19% over the past decade, with the exception of the drop in 2014 when Canadian operations were losing money. Once Target earnings rebounded by 2016, this indicator went up to 24%. I generally like seeing a high return on equity, which is also relatively stable over time.
