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Why Target Stock Is Worth the Risk

The U.S. economy just recorded its second straight quarter of contraction. Whether it will officially be declared a recession doesn’t really matter. Investors now have to make decisions in an ongoing economic downturn regardless of how it’s defined. 

Consumers are managing their money in an uncertain and inflationary environment. Some may wonder why investing in a retailer at this time would make any sense. But there are several good reasons why buying stock in a retail giant like Target (NYSE: TGT) right now is worth the risk. 

A quarter to forget

Target shares plunged nearly 30% during the week in May when it shocked investors with its first-quarter earnings report. While it marked the company’s 20th consecutive quarter with sales growth, management warned there are more troubling results ahead. Target miscalculated the changing consumer trends and was caught with too much inventory of the wrong products. 

While the company still expects slight growth in revenue for the full year, it revealed an inventory optimization plan that would include markdowns which would negatively impact operating profit. Management now expects product promotions to drop its operating margin rate to just 2% in its current fiscal second quarter. That’s compared to an already disappointing 5.3% in the prior quarter and 9.8% in the year-ago period. 

Trouble brings opportunity

In a sign of confidence of which investors should take note, Target also announced a 20% increase in its dividend shortly after unveiling its new guidance. With its dividend track record and position as one of the stock market’s Dividend Kings, this latest increase shouldn’t be taken lightly. While the nearly 30% drop in the share price this year could mean opportunity for future capital appreciation, the company also pays a reliable quarterly dividend that has grown from $0.14 to $1.08 per share over the past 15 years.

TGT Dividend data by YCharts.

It also brings investors passive income while waiting for the shares to recover. During that time period of continuously growing dividends, the business endured the Great Recession as well as the COVID-19 pandemic and ongoing impacts from it. The current dividend yields about 2.6% annually. But for those who bought shares 15 years ago, today’s dividend carries a 7.2% yield on that initial capital. And there’s every reason to think Target will emerge from current challenges as a thriving business once again. 

Resilient consumers 

Whether the U.S. is technically in a recession or not isn’t a critical distinction. What is important is where the retail industry will go from here. With or without an economic downturn, consumer spending has been notably resilient in the U.S. for many years. Over the last three decades, consumers and investors have endured the dot-com bubble, the Great Recession of 2008-2009, and a global pandemic. Yet consumer spending has consistently recovered each time.

Target has proven to be a great investment over those same 30 years. The total return, including dividends, has more than tripled that of the S&P 500 index over that time. The company offers income through its consistently growing dividend and has been transparent with investors about its plan to correct the recent inventory problem. All things considered, that makes an investment in Target stock worth the risk. 

Howard Smith has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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