Target Corporation (TGT) has been actively managing its cash flows, returning much of its free cash to shareholders through share repurchases, while maintaining a healthy balance sheet and credit ratios that are necessary for investment-grade ratings.
The operator of general merchandise and food discount stores in the United States recently announced that it completed the $10 billion share buyback program authorized in November 2007, which facilitated it to repurchase 193.5 million shares at a price of $51.68 per share. Target will now commence its share repurchase activity under its $5 billion program announced in January 2012, to be exhausted in 2 to 3 years.
During fiscal 2011, the company bought back 37.2 million shares at a price of $50.89 per share, aggregating $1.9 billion, lowering the share count by more than 5%. The company now expects to repurchase shares worth approximately $1.5 billion or more during fiscal 2012, which will lower the share count by 4%.
Another financial mechanism, which the companies use from time to time to augment shareholders’ value, is dividend. Since, 1967, when Target became a public company, it has been paying quarterly dividends regularly.
Moreover, the company has been consistently raising its dividend for the last 40 years, and expects it to increase to $3.00 per share or more by 2017 from the current $1.20, if the company meets its target of $8.00 earnings per share or more by that time. For fiscal 2012, Target now projects earnings between $4.55 and $4.75 per share.
Returning Trend
Increasing dividend and share repurchase activities are becoming a trend these days, mostly followed by companies that boast of a stable cash position and healthy cash flows. These strategies not only enhance shareholders’ return but also raise the market value of the stock. Through this strategy, the companies bolster investor confidence on the stock, thereby persuading them to either buy or hold the scrip instead of selling them.
Recently, a consumer electronics maker, Apple Inc. (AAPL), which is sitting on a cash pile of approximately $97.6 billion, hinted that it will kick-start a $10 billion share repurchase program and pay a quarterly dividend of $2.65 per share.
Closing Commentary
Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy and new merchandise assortments, should help drive comparable-store sales and operating margins over the long term. We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment.
The company in order to entice customers is also providing an additional benefit of free shipping for any e-shopping to its cardholders, who are already getting 5% off for the purchases they made.
Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores, and eyeing opportunities to open stores in international markets.
However, the greater concentration of Target’s revenue generating capability in a few regions of the United States, poses a competitive threat, compared to Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST), who are geographically more diversified and more resourceful.
Consequently, we have a long-term ‘Neutral’ rating on the stock. Moreover, Target holds a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation.
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