Four Problematic Dividend Hikes: Target, Best Buy, FedEx, Caterpillar

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Investors still love dividends and stock buybacks. On top of these corporate governance and return of capital strategies in general, investors really love when they are holding a stock where the payouts are rising. Dividend hikes are supposed to be good in that they represent management’s confidence that the new payout rate can be maintained for years into the future. So, what happens when you see companies with problems raising their dividends?

This last week we saw two really odd dividend hikes that seemed out of place, followed by two other dividend hikes which were less problematic but still with issues. Target Corp. (NYSE: TGT) had its annual meeting, and delivered what just felt like a crazy dividend hike. Things are not exactly great yet at Best Buy Co. (NYSE: BBY) either, but the electronics and appliances retail giant also boosted its dividend.

Then there is the case of FedEx Corp. (NYSE: FDX) and Caterpillar Inc. (NYSE: CAT), where things are great at one and still questionable at another — despite a stellar performance.

24/7 Wall St. has ranked these in order of how problematic these dividend hikes are, with the most problematic first.

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Target Corp. (NYSE: TGT) is one where we gave a more detailed outlook, but the hike here just seems like management decided it better go for bust or go home. The retail giant is not past its woes of a massive security breach, and the company canned its CEO. Still, its dividend was raised to $0.52 from $0.43 per share — a payout boost of some 21%, at a time when it is still recovering.

Target’s $57.23 share price and the new payout generates a dividend yield of more than 3.6%. This is excessively higher than other retailers in the S&P 500 Index.

Maybe Target is merely trying to signal that the drop from a high above $73 is just making this an accidentally high dividend. The question is whether people believe it. At $57.23, the consensus analyst price target is only $59.33. Very few analysts and investors expect to see the stock back above $70 any time soon.