Dividends are the most reliable signaling mechanism: When increased, they usually foreshadow sunshine and smooth sailing. When cut, they usually foreshadow gloom and turbulence.
Investors would be wise to heed Target Corp.’s (NYSE: TGT) quarterly dividend, which was not only increased, it was increased by an eyebrow-raising amount – 21%. The latest increase lifts the annual yield to 3.6%, a full percentage point higher than rival Wal-Mart Stores (NYSE: WMT).[ad#Google Adsense 336×280-IA]Annual dividend increases are nothing new for Target. The dividend has been increased annually since 1972. That the dividend is increased in double-digit percentages is also par for the course.
The dividend has been increased at a 10%-or-better rate for the past 17 years.
The latest dividend increase, though, holds special significance: It signals that all is well within Target and that improvements are on the way.
Of course, the perception among investors these days is that all isn’t well. Events over the past year support that perception.
First, Target attempted to jump-start growth with an ambitious move into Canada. Over the past 12 months, 127 stores were opened. To say the move into the Great White North was poorly executed would be the understatement of the year. In 2013, Target’s Canadian operations lost $941 million.
The perception of a troubled company was exacerbated by a Christmas-season security breech. In late November/early December, hackers infiltrated Target’s information systems to abscond with 40 million credit and debit card numbers and the personal data of 70 million shoppers.
Now, overlay poor execution and a massive security breach with a sense of consumer ennui – evinced by six-consecutive quarters of falling traffic – and there’s little wonder that Target’s shares are down 20% over the past 12 months.
But that was the past. Investing is always about the future, and for Target investors, a 21%-dividend hike.
The board of directors wasted little time in giving CEO Gregg Steinhafel his walking papers. A couple weeks after Steinhafel was dispatched, the head of Target Canada, Anthony Fisher, also found himself unemployed.
Since Steinhafel’s departure, top executives have been given more leeway to plot strategy and implement projects. “Our ability to speed things up has gotten exponentially faster,” said Chief Marketing Officer Jeff Jones in a recent Wall Street Journal article. “We aren’t waiting for a new CEO to arrive.”
Indeed, Target has aggressively expanded Target Subscriptions, a new online service, which has been a raging success. Target Subscriptions used to feature scheduled free delivery of 250 consumer products. That number was recently increased to 1,600 consumer products. Target Subscriptions accounts for 15% of Target’s online sales, up from nothing a year ago.
Mannequins are another example of Target’s commitment to speed. The company tested the idea of putting mannequins in a single big-box location in January. The concept worked, so mannequins will be in hundreds of stores by the end of the year.
That said, investors shouldn’t wait for operations to improve before buying Target stock. Once investors get whiff of discernible improvements, they will be just as fast in bidding up Target’s value-priced shares.
Source: Wyatt Investment Research