Friday, January 24, 2014

Recent Buy

I did not originally plan on making any purchases in my DGI account in January but I decided to move the cash from my non-DGI account over and added a bit of fresh funds to allow me to purchase 25 shares of Target Corp. (TGT) for $58.88 on Wednesday, 1/22/14. I have previously mentioned Target in my 2014 Top Stocks post and the post on Ignoring and Embracing the Noise. This purchase adds $43 to my forward annual dividend projection, assuming a stable dividend. TGT has a 19.8% 10 year dividend growth rate and their smallest percentage increase since 2003 was a 13.3% increase in 2009. This is extremely impressive growth and really shows a commitment by TGT to return capital to shareholders. The last increase in 3Q 2013 marked TGT’s 46th straight year with a dividend increase! While I expect to see the rate of dividend growth to decelerate towards their earnings growth (payout ratio as increased from 13% in FY2004 to 29% in FY2013), I see no reason they cannot continue increasing dividends.

Why I like TGT here

First and foremost, I think TGT is an extremely well run retailer with strong management and a commitment to returning capital to shareholders. This commitment can be seen in both the rising dividend discussed above and the share buybacks the company has been executing. I typically prefer dividends as many share repurchase plans only offset the issuance of new shares to executives, etc. but TGT has reduced the average diluted shares outstanding form 754.8 million shares in 2010 to 663.3 million shares in 2013. In addition, I believe the combination of the weaker than expected Canadian expansion, combined with the recent negative headlines around the credit card hack they experienced, has provided a reasonably decent value. As a result of these items (primarily the Canadian expansion), earnings for FY2014 are going to be significantly below that of FY2013. S&P is currently projecting an increase of 34% in 2015 as losses in Canada diminish. As the negative headlines around the credit card fraud fall off the front page and from the minds of consumers, I expect sales in the US to return to normal (after a short term impact) and investors to begin to look forward towards FY2015 and FY2016 where TGT looks to bounce back strong. Once this happens, I expect current prices to look quite attractive in the big scheme of things, even if they drift a bit lower from here (I think $55-$57 is quite possible but I am no market timer).


The biggest risks I see for TGT are similar for retail in general. Namely, a slowdown in the US economy effecting consumers and the changing dynamics of consumers buying online. Long-term, I think TGT must work on improving their web operations so as to compete with Amazon, Walmart (WMT seems to be ahead in focusing online) and other online retailers. As with any investment, I will need to continue to monitor TGT to ensure it continues to be worthy of my portfolio. There is also the potential that the fallout from the recent credit card hack could be greater than what I, or the market, is currently predicting.

What Next?

There were multiple stocks that have recently come down to levels that I find more attractive. I’ve been watching GIS closely but it just doesn’t seem to want to fall under $48 just yet. Had I waited a couple of days, CVX would have this choice much more difficult as it trades under $117 as I write this. PG was beginning to look interesting around $79 but a pop on earnings now brings it slightly above the range I would want it. JNJ and KO are also moving up my list as they fall in price and I will hope and pray they can fall more (and not bounce back up) until I build up capital for another purchase. I am also beginning to look at SJM but need to do more research on it still. Currently, I am mostly interested in new positions but PM, PEP and MCD look attractive right now, as does DE from my non-DGI portfolio (it qualifies for my DGI portfolio but is currently held in the other account). Lastly, I would love to add WMT to my portfolio to balance this TGT purchase. WMT sounds like they are appropriately focused on the challenge of competing with Amazon online and I think they will reward investors for a long time to come. I likely will not make another buy until late February, or more likely, March. Hopefully the market provides me with lots of compelling opportunities come then :)

What do you think of my TGT purchase? What are you currently watching?

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