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Tickers in this Article: TGT, JPM, DDS, GE, SHLD
A snippet of news came across the tape on May 5 after the closing bell about Target (NYSE:TGT). The retailer is unloading its credit card receivables. The news didn't garner much attention, perhaps because its earnings season, but I think this sale deserves more than a passing glance.

The Details
Target is selling an approximately 47% stake in its credit card receivables for some $3.6 billion. JP Morgan Chase (NYSE:JPM) is the buyer. The transaction is expected to close later this month. This is good news for Target.

More Money, Less Risk
This transaction could provide Target with a decent amount of liquidity, and liquidity equals options. Target could use the dough to buy back stock and reduce the share count, thereby giving its earnings per share number a shot in the arm. (For further reading on this, check out our related article A Breakdown Of Stock Buybacks.)

It could also reinvest it back in its stores or in advertising. It could save it for a rainy day. The point is that this move comes at a great time, and will help the company remain competitive and make it even more attractive to both retail and institutional investors. The other aspect or the other positive is that the transaction may also help the company mitigate risk. With the economy slowing there is a greater chance customers will be tardy on their payments.

Finally, I think that the deal puts it on par with other retailers that have taken similar courses of action. For example, Dillard's (NYSE:DDS) sold off its credit card business to GE (NYSE:GE) back in 2004. And in 2003 Sears (Nasdaq:SHLD) jettisoned its credit card portfolio.

If nothing else, this should allow Target to do what it does best - sell merchandise.

Tossing Ackman A Bone
Pershing Square Capital, a well-known hedge fund headed by Bill Ackman has been accumulating shares of Target over time, and now holds about 10% of the stock. Ackman has been pushing Target's board to sell off its card receivables as a means of unlocking value. Now that Target has taken Ackman's advice, hopefully he will back off.

I'm not saying that Ackman was too pushy or that he's bad for the stock. To the contrary, I think it's great that he wants to hold management's feet to the fire. However, I don't want to see Ackman become too bold and distract the board's attention. (To read more about ruthless investors like Ackman, read Activist Hedge Funds.)

I think this news could also drive the sell-side to draft positive research in the weeks ahead. I'm speculating on this point, but this could cause the stock to pop.

Bottom Line
News that Target is selling its credit card receivables seemed to fall on deaf ears, but this "small" move will enhance liquidity, which again could permit the company to buy back stock or plunge money back into the business. Sometimes good things do come in small packages.

To learn more about investing in this sector, check out Analyzing Retail Stocks.

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