I stick to my view which many investors don’t share: this decade will be remembered as the one where dividends have been cut, not sparing big names. With this, I do not mean the obvious candidates like cyclical commodity producers or European car makers, but the ones where it really hurts (for dividend and income investors). In the past, I have written several weeklies, digging out names with proud series that have come to an end or with a high likelihood will end in the not-too-distant future. My next target is another dividend king.
Summary and key takeaways from today’s Weekly
– There are over 50 dividend kings in the USA — companies that have raised their payouts every year at least fifty times in a row.
– Occasionally, one or the other drops out — my latest victim: Target Corp.
– The retailer is showing extreme weakness, being likely more a dangerous value trap than a great buying opportunity. I view the dividend to be in danger.
When I published my weekly titled “MEGATREND OF THIS DECADE: DIVIDEND CUTS” (see here and also the predecessor here) almost three years ago in March 2023, the reactions on twitter, my personal sentiment barometer (and the only social media platform I am active on) showed muted reactions or broad disbelief.
One of the most common answers was that a company has a proud series and a strong track record, so the dividend is safe. Numbers don’t lie.
The thing is, this is looking in the rear view mirror while driving in the opposite direction.
My approach is to check the present setups based on recent performance and contemporary information to blend it into an outlook for the future — not to assume what happened in the past is granted to happen in the future as if circumstances would never change.
One obvious factor that shocked many companies was the spike in inflation rates together with aggressively higher interest rates. These caught the weakest companies on the wrong foot. But also the stickiness of inflation together with high debt loads and the potential reappearance of a recession — many people today don’t know anymore what that is — are a toxic cocktail.
After some research, I stumbled upon a famous dividend king that might be next in line.
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Today’s Target in the crosshairs
There are 50-something dividend kings in the U.S. — companies that proudly have increased their payouts to shareholders every year for at the minimum half a century.
According to Sure Dividend (see here), the current figure is 56 entities, spread over various sectors. The biggest sector is consumer staples with the most names in this category. Surprisingly, there are also many industrial companies where one (like me) could initially assume these more cyclical businesses do not show up so often on such a list.
I was wrong — happy to admit that.
The group of consumer stocks fits very well into one of my recent weeklies (see here), where I laid down why I think that many consumer companies and their stocks, exceptions apply, are in a structurally challenged environment, and not just a temporary cyclical slowdown in consumption, like many assume.
Which leads us to today’s target — a consumer company.
Target Corp. (ISIN: US87612E1064, ticker: TGT) has never skipped a dividend since the company became public in 1967 and it raised it 57 years in a row.
In brief, Target is an American general-merchandise retailer founded in 1902, originally as Dayton Dry Goods, later rebranded as Target in 1962.
Target is operating nearly 2,000 large-format stores that sell stylish apparel, home goods, beauty, electronics, and toys — i.e. discretionary items — but also staples like household essentials and limited groceries.
In the USA it is most directly compared to Walmart (broader and cheaper) while positioning itself as the more design-forward, “cheap-chic” alternative. It also calls its customers famously “guests”.
As a side note, in Germany the closest equivalent might be the hypermarket chain “real” (though without the “chic” appearance, to the contrary), which as many of my German readers will know is disappearing. But this by no means apple to apples.
Target’s main competitors are Walmart, Amazon, Costco and (for fashion / home) Kohl’s and TJX. But there’s no 1-1 rival. Target’s stated edge is offering affordable, trendy, exclusive own-brands (like Cat & Jack, Threshold, Good & Gather) in bright, pleasant stores with strong digital pickup / delivery options, creating an experience that feels noticeably more upscale than traditional discounters.
And if you’re already there, just pick up some household essentials.
However, Target made headlines through some questionable moves, trying to hit the woke zeitgeist that briefly swept over corporate America.
This has cost the company billions as their “guests” became guests elsewhere.
But that was just as a side note.
Looking at the long-term chart, we can see two things: first, a rapid rise where the not-small company within a few years saw its stock jumping from 70–80 USD to way over 200 bucks. And second, a brutal decline for a company that was thought to be relatively stable.
TGT stock is almost back to square one.
The performances accordingly for long-term buy-and-hold investors is very meager, returning only 2.9% annually over about 20 years. Okay, dividends come on top, but this makes it only minimally better.
In my view it is a mix of the woke overshooting, a correction of the pervious excess surrounding the lockdowns, and a general consumption fatigue in many areas — not sparing seemingly more defensive items and companies that sell them.
Target is clearly more prone to cyclical swings compared to retailers that focus on groceries or off-price offerings. But this alone does not seem to be a proper explanation.
Looking now at a few key figures, it becomes clear Target has issues under the hood.
The corrections of the previous excess and the woke period resulted in topping and then falling sales — unfortunately, until this very day.
Zooming in on the trailing-twelve-months basis, we can see that sales growth, or better de-growth, has been brutal. With the exception of one surprise quarter in between, sales have been falling since late 2023, i.e. for two years.
In an environment of first high, then still-sticky inflation!
The message is clear: Target’s stuff is more optional than essential.
Inflation does not hit just customers, while the “greedy sellers” enrich themselves.
Target was hit really hard by cost pressure — goods are obvious, but of course also labor, where salary increases and minimum wages adjustments are closer to inflation rates while the sales growth figures go in the other direction, squeezing the company unpleasantly.
This is not good for a high fixed-costs and low-margin business like Target.
Being it gross margins…
… or operating margins…
The company is heavily challenged, with the trend showing in the wrong direction.
And we haven’t had a real recession, yet. In fact, not since 2009.
That’s why I am very skeptical about Target’s ability to keep up its proud dividend track record. Other investors might view the current weakness as a great buying opportunity “for the long-term” — I do not.
Target has 3.8 bn. USD in cash, but 16.5 bn. USD in financial debt, for a net debt figure of a bit less than 13 bn. USD. The thing is, cash has been constantly falling, while debt increased over the years. Management seemingly planned for a broad expansion, but this is not how things developed.
The latest quarterly figures do not offer any hope for a quick turnaround.
To the contrary, comparing the numbers below with the ones above, we can see the decline is even accelerating which fits into my general view that economically sensitive companies should be treated very carefully from an investment perspective.
Unfortunately, management guided for a Capex increase of 25% (!) for next year.
You read correctly.
They are expanding into broad consumer weakness very aggressively. In concrete numbers, this means that Capex will rise from the current about 4 bn. USD to around 5 bn. USD.
Operating cash flow by the last numbers swings around 6.5 bn. USD. Subtracting the current Capex amount, free cash flow comes in at a healthy-looking 3 bn. USD.
The word “looking” is the issue.
It does not help to act by looking backwards. The new FCF for the foreseeable future should come in around or even below 2 bn. USD — assuming management pulls through with their investments.
The problem is, the dividend costs at current figures exactly … 2 bn. USD!
Somethings not working out here.
At current cash flow figures and subtracting the Capex guidance for next year, clearly results in a shortfall of a few hundred million USD to entirely cover the dividend.
If the balance sheet were clean, this would be no big issue.
But 4x the current FCF is not little. Remember, this retailer is more cyclical than others. And, please keep in mind we are counting with today’s operating cash flow — basically assuming the business magically finds its way back to at least a black zero growth-wise.
I am not sure this will happen.
Or said differently, I would not plan with a best case, but with a realistic base case, however, not neglecting what could go possibly wrong.
For me, the path forward looks too optimistic, honestly.
It likely sounds a bit too pessimistic, especially from the viewpoint of an optimistic dividend investor — but Mr. Market seems to be aligning closer to my thoughts. Else, the dividend yield would not be so unusually high. Target under normal circumstances yields 2-3%, but not 5%.
Defendants of the dividend track record might throw in that in 2017 the dividend yield had exactly the same level. My answer to this: but we weren’t as close to a recession with a sticky and persistent cost-of-living crisis like we are dealing with now.
And it was before the woke own goal and demographics falling off a cliff.
So, decide for yourself.
What is the upside, what the potential downside?
For me it is clear — I am passing on this one. On a price to sales ratios, TGT stock might look like the steel of the decade. But please keep in mind the company is performing its worst, too — sales are shrinking, costs are rising, margins are squeezing.
Is it worth it?
I think no. Either management throws in the towel with their Capex goals or the dividend will have to be cut — or maybe both. But I do not see any meaningful-enough upside in this case to justify the risks that can drive the stock noticeably lower.
Especially if the dividend is targeted.
Conclusion
There are over 50 dividend kings in the USA — companies that have raised their payouts every year at least fifty times in a row.
Occasionally, one or the other drops out — my latest victim: Target Corp.
The retailer is showing extreme weakness, being likely more a dangerous value trap than a great buying opportunity. I view the dividend to be in danger.
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