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Plain Dividend Yield’s For Chumps: How Target Boosts Payout 20% Annually

Over the past five years discount retailer Target (TGT) has given shareholders an annualized 20% increase in their dividend payouts. That lands Target in third place among S&P Dividend Aristocrats -- companies in the S&P 500 index that have managed annual dividend increases for at least 25 consecutive years. Target’s current 2.4% dividend yield is higher than the payout for the S&P 500 index.

While Target is busy cutting prices to stave off Amazon (AMZN) encroachment, shareholders need not worry about any such trim to the dividend. The standard payout ratio and the cash payout ratio are both below 30%. In the insanely competitive discount retailing industry, Target’s free cash flow -- nearly $3 billion for the trailing 12 months -- has rebounded strongly since the recession.

TGT Free Cash Flow TTM Chart

TGT Free Cash Flow TTM data by YCharts

Target is only one of two dividend growers on our list to currently earn an Attractive rating. Aflac (AFL), #6 on our list is the other. The other dividend growth stocks covered in the series include Clorox (CLX), T. Rowe Price (TROW), Wal-Mart (WMT), Medtronic (MDT) and W.W. Grainger (GWW).

While Target stock has delivered index-beating gains, valuation hasn’t budged. Its current 13.3 PE ratio and 0.55 price/sales ratio are significantly below their 2007 levels.

TGT Total Return Price Chart

TGT Total Return Price data by YCharts

So what gives? Target is shedding profit margins in the short-term in an effort to retain market share long-term. Earlier this month Target announced that it would extend its online price-matching offer that was in place for the holiday season, for the entire year. Target will match any price customers can find at major online competitors including Amazon.com and Walmart.com. As YCharts’ Jeff Bailey reported, Amazon’s prices are on average about 13.6% below Target’s, according to one analyst’s tally.

Margins have already been trending down, but Target’s level of earnings before interest, taxes and amortization (EBITDA) relative to net sales remains impressive compared to its bricks-and-motor competitor Wal-Mart.

TGT EBITDA Margin TTM Chart

TGT EBITDA Margin TTM data by YCharts

Amazon was intentionally left off that chart. The revenue-and-market share-at-all-costs (no profits) Amazon business model makes earnings irrelevant in Bezos-land.

The wildcard for investors is how the price wars among the retailing big boys play out in the coming years. As an earlier chart showed, Target’s stock has managed to deliver in a very competitive landscape. Not because of true-believer fever (see: AMZN) but rather, a concerted effort by Target management to keep delivering shareholder value. Target has bought back more than 20% of its shares over the past five years; helping to pull up earnings per share.

TGT EPS Diluted TTM Chart

TGT EPS Diluted TTM data by YCharts

Given the stock’s current low valuation and nearly $3 billion in free cash flow, there’s room for more repurchases.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

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