Considering the yield, the specified stock outperforms Walmart significantly, but is its potential return commensurate with the associated risks?
Considering the yield, the specified stock outperforms Walmart significantly, but is its potential return commensurate with the associated risks?
Walmart (WMT) touched a new record high last Friday, with a 24% increase in value since the start of the year. On the other hand, Target (TGT) has seen some ups and downs since November, managing only a 2% growth in value despite an impressive performance during the initial stages of the pandemic.
Let's assess these two retail giants to determine which would make a better dividend investment at the moment.
Dive into the numbers
Both Walmart and Target were impacted by supply chain issues, inflation, and a decrease in consumer spending on non-essential items. Walmart, with its focus on essentials and a budget-friendly strategy, was better equipped to navigate these challenges. It managed inventory and consumer behavior forecasts effectively, resulting in a less drastic decline compared to Target.
As shown in the graph, Walmart has consistently maintained sales growth despite these hurdles, with its operating margin almost fully recovering. Target, however, enjoyed strong sales and margin growth during the early stages of the pandemic but has since seen flat sales growth and a significant decrease in margins, which it is still working to overcome.
Walmart's success is rooted in high sales volume and low margins, whereas Target's relies on a premium in-store shopping experience to justify increased prices and higher operating margins. In retail, striking a balance between prices and volume is crucial. Walmart clearly leads its competitors in this regard, while Target does not.
When Walmart announced its financial results for the full fiscal year 2024 in February, it forecasted a 3% to 4% increase in consolidated sales, a 4% to 6% increase in consolidated adjusted operating income, and $2.23 to $2.37 in adjusted earnings per share (EPS). Based on this revised forecast, it now aims to achieve the upper end, or even surpass it. If Walmart manages to hit the top end of $2.37 in EPS, this would represent a 16.8% growth compared to the $2.03 in EPS it achieved in the previous fiscal year.
Meanwhile, Target updated its guidance to forecast a 0% to 2% increase in comparable sales and GAAP and adjusted EPS of $8.60 to $9.60. The midpoint of $9.10 represents a mere 1.8% increase from the $8.94 in GAAP EPS that Target achieved in 2023.
Both companies' financial reports and outlook suggest that Walmart managed the recent downturn better than Target and is also growing at a much faster pace. When considering a long-term investment opportunity, it is not wise to overly focus on a company's short-term results. However, even in the long term, Walmart appears to offer some advantages over Target.
The era of two-day shipping and mobile shopping has placed pressure on both Walmart and Target to innovate. Both companies have been successful in investing in e-commerce and curbside pickup. Walmart's physical stores, along with curbside pickup, provide a level of convenience that is harder for Amazon to emulate.
Walmart's focus on price and its complete grocery store business positions it well for off-site sales (curbside and home delivery). Walmart+ was introduced in 2020, followed by an on-demand home delivery service (Walmart+ InHome) in March 2024. Walmart+ offers free delivery and additional benefits for $98 a year, with Walmart+ InHome adding $40 a year for kitchen, garage, or doorstep delivery at a time of your choice on orders totaling $35 or more.
Amazon has attempted to replicate this with Whole Foods and Amazon Fresh, but its offering is more limited compared to Walmart's extensive grocery business. Target, unfortunately, does not fare as well in the e-commerce sphere, as it lacks a compelling unique selling proposition to differentiate itself from Amazon.
Target's strengths
While Walmart is a superior business in terms of resilience during an economic downturn and growth potential through e-commerce, Target has two dominant advantages: valuation and dividend.
Target's P/E ratio is only 16.3, compared to 28 for Walmart, with a yield of 3%, compared to 1.2% for Walmart. Walmart has been priced higher than Target for over three years now, even though it is growing faster. However, the difference in valuation is surprising and substantial, particularly given Target's recovery (albeit at a slower pace than Walmart).
Both Walmart and Target are recognized as Dividend Kings, with a track record of at least 50 consecutive years of paying and increasing dividends. They both have low payout ratios – 49% for Target and 33.1% for Walmart – suggesting there is room for further dividend growth.
Target's most significant advantage over Walmart is its dividend. It boasts an attractive 3% yield, a strong track record, and a reasonable payout ratio. Walmart's 1.2% yield, on the other hand, is too low to generate reliable passive income, even though its lack of dividend growth isn't due to a lack of raises but rather due to the stock's price growth outpacing dividend growth.
Regardless, Target is a strong contender when it comes to value and income.
While Walmart adheres to a value-driven retail approach, Target operates as a value-oriented stock. Despite encountering hurdles, Target's dividend remains secure. The company continues to thrive financially and produces earnings exceeding twice the necessary amount to cover its dividend expenses. Its half-a-century legacy of boosting the dividend signifies its capacity to enhance the payout during numerous phases and economic downturns.
Walmart exhibits a greater potential for growth in the long run, yet its stock is priced exorbitantly and offers a lower return. If you're an investor with a long-term perspective and less concern for present dividends or valuation, Walmart might be a more attractive option. But, considering Target's superior dividend stock status, its current price appears too affordable.
Given the benefits of both corporations and how Walmart's advantages counterbalance Target's weaknesses (and vice versa), it might be sensible to embrace a 50/50 investment in both stocks.
Considering the potential for long-term growth and the current stock prices, investing in both Walmart and Target could provide a balanced portfolio. Given Target's attractive dividend yield and Walmart's growth potential, diversifying your investment by allocating funds proportionately to both stocks might be a wise strategy.
Furthermore, given the robust financial performance of both retail giants, investing in their dividend-paying stocks could be a smart move for those seeking passive income from the finance sector, especially considering Target's higher dividend yield compared to Walmart.