On June 9, the board of directors of Target Corp. (TGT) authorized a 47% increase in its quarterly dividend. Target will now pay a quarterly dividend of 25 cents per share, up from 17 cents per share paid on June 10, 2010. The increased dividend will be paid on Sep 10, 2010 to shareholders of record as on Aug 20, 2010.
Target has had a consistent track record of paying quarterly dividends and this announcement marks its 171st consecutive dividend payment since 1967. Target believes the cash generated is well above the amount needed for optimal reinvestment in its core business and thus intends to return the surplus cash to shareholders. The last paid quarterly dividend of 17 cents represented an increase of 3.9% year over year.
The dividend hike, which will require Target to shell out an additional $235.7 million a year, was primarily supported by the company’s strong balance sheet and its ability to generate a healthy cash flow. Target’s annualized dividend yield of 1.86% is higher than its nearest peer Costco Wholesale Corp. (COST). Costco’s annualized dividend yield is 1.43%.
Besides dividends, Target is also buying back shares. During the first quarter of 2010, Target repurchased 7.5 million of shares for $394 million.
Target remains strong with respect to its cash position and cash inflow, significantly supporting the asset side of its balance sheet. Cash and cash equivalents at the end of the first quarter was $1.6 billion, higher than $1.4 billion at the end of the fourth quarter of 2009. Cash from operations during the first quarter was strong at $1.2 billion versus $1.0 billion during the fourth quarter of 2009.
Overall, 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 in the long term. We expect the company to gain market share and believe that increased focus on consumable items will boost sales and earnings even in a sluggish retail environment.
Besides, with the economy stabilizing, the other merchandise categories also appear to gain strength. 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 the international markets beyond a period of 3−5 years. However, unfavorable consumer spending pattern and increased competition still limit an upside.
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