It’s not too often that you find a dividend aristocrat with a 3% dividend yield and 20% annual dividend growth over the past decade.
Target (TGT) just so happens to be one of these stocks. The company has been in business for more than 100 years and will likely be around for the next 100 as well.
Despite the company’s durability, it has faced a number of challenges in recent years – the 2013 data breach, an unsuccessful expansion into Canada, and rising pressure from e-commerce competitors.
Let’s take a closer look at the business and see if these challenges make TGT a worthwhile investment for our Top 20 Dividend Stocks portfolio today.
Business Overview
TGT was incorporated in 1902, but its first discount Target store opened in 1962. The company now has nearly 1,800 locations across the United States. TGT’s stores focus on convenient one-stop shopping and competitive discount prices, offering a broad range of product categories including personal care, beauty, electronics, apparel, food, furniture, appliances, baby care, movies, and much more.
The company is the second largest general merchandise retailer in America, second to only Walmart (WMT). Compared to Walmart, TGT is much smaller ($73 billion in sales last year vs $486 billion at Walmart), has less grocery business (21% of sales vs 56% at Walmart) and targets a relatively wealthier demographic. TGT’s typical customer is 40 years old and has a median household income of $64,000. Approximately one-third of TGT’s sales are related to its owned and exclusive brands. The rest of its products are mostly national brand merchandise.
Business Analysis
Like most companies with over 100 years of operating history, TGT has not been without its challenges. Many consumers remember TGT’s data breach that exposed about 40 million credit and debit cards to fraud in December 2013.
According to the Wall Street Journal, trade groups representing community banks and credit unions estimate that they spent more than $350 million to reissue credit and debit cards and deal with other issues tied to TGT’s breach and the subsequent Home Depot hack.
TGT settled with Visa for $67 million earlier this year and is expected to strike a similar agreement with MasterCard. The costs of the settlement were already reflected in its 2013 and 2014 results, but the data breach certainly gave TGT a black eye with consumers.
While the data breach was going on, TGT’s former CEO was focused on expanding the company into Canada to drive growth. The company’s strategy was overly aggressive from the beginning as TGT bought 124 locations in 2013 by purchasing all of the outlets from Zellers, a failed discounter with presumably subpar locations. Perhaps things would have turned out differently if the company launched new stores slowly and in locations that had been researched better.
Regardless, store location wasn’t the only problem. TGT faced numerous supply chain challenges that resulted in empty shelves and prices that Canadian shoppers found to be too high. After racking up $2 billion in losses since its creation in 2011, TGT’s former CEO Gregg Steinhafel, who had spent 35 years at the chain, was replaced by Brian Cornell, a hands-on retail guru who helped improve operations at Safeway, Michael’s Sam’s Club, and Pepsi.
