Target Corporation (TGT), the operator of general merchandise and food discount stores, recently hit the market with the news of a dividend increase, revealing its plan to utilize its free cash to enhance shareholders’ return, thereby boosting investors’ confidence in the stock.

Minneapolis, Minnesota-based company, Target, raised its quarterly dividend by 20%. This is the 176th time the company has paid dividends since going public in October 1967.

The board approved an increase in annual dividend to $1.20 per share (or 30 cents quarterly) from $1.00 (or 25 cents quarterly). The increased dividend is slated to be paid on September 10, 2011, to stockholders of record as on August 18, 2011.

Target also recently posted lower-than-expected sales results for the four-week period ended May 28, 2011, due to softness in traffic in the second half of the month. Moreover, consumers remain cautious on their spending on account of higher gasoline prices and commodity inflation.

The company’s comparable-store sales jumped 2.8% for May 2011, following an increase of 13.1% in April 2011, and compared with a growth of 1.3% witnessed in May 2010.

Target’s strategic initiatives such as REDcard Rewards program and P-fresh in-store food and grocery sections should help drive comparable-store sales and operating margins in the long term. We believe that increased focus on consumables will boost sales in a sluggish retail environment.

The company is also managing its costs effectively, resulting in margin improvement and bottom-line growth. Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores and opportunities to open stores in international markets. However, unfavorable consumer spending pattern and increased competition still remain concerns.

Target, which currently operates 1,755 stores in 49 states, faces stiff competition from Wal-Mart Stores Inc. (WMT). Currently, we have a long-term ‘Neutral’ rating on the stock. However, Target holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation.

 
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