When companies raise their dividends, it is usually a message from the company’s management that the underlying business fundamentals can carry the company’s cash flows at the same or sufficient levels for years. With all the woes that have taken place at Target Corp. (NYSE: TGT), a rational dividend and income investor might have expected that the company would just keep pat on its dividend. Well, Target is trying to say something with its higher dividend at the company’s shareholder meeting.
What the company is trying to say is that it can navigate through its troubles now and still be able to maintain the same payout ahead. Some investors are likely to have some doubts, but that is what this feels like.
Target’s board of directors declared a quarterly dividend of $0.52 per common share, up from a prior dividend of $0.43 per common share. The new annualized dividend will come to $2.08 per year, or with a yield of 3.66% based upon a $56.80 share price.
The question from 24/7 Wall St. is whether Target can really afford this new dividend. After all, a 3.66% yield is extremely high for a retailer. So, the $2.08 payout compares to earnings per share estimates of $3.69 EPS in 2014 and $4.32 EPS in 2015, If you take a blended annual estimate of $4.00 per share — so $2.08 is barely half of the forward earnings expectations of the next two years.
A payout ratio of 50% may seem high, but the real situation is that Target is currently retrenching. It is investing internally after its card swipe debacles, and it has gaps in management at this time. Still, it doesn’t seem likely that Target will go out and take on a lot of new land for a surge in store openings any time soon.
Our take is that this dividend hike feels a bit like a publicity stunt. Still, maybe the company is signaling that it can make its earnings estimates or get close enough that the past woes just do not really matter in the long-term.
The new dividend is payable on September 10, 2014 to shareholders of record at the close of business August 20, 2014.
At $56.80, Target shares have a 52-week range of $54.66 to $73.50.