Target Corp. (TGT) is on course to raise its dividend for the 46th consecutive year in 2017, according to words from Chief Financial Officer Cathy Smith. With stiff competition in the retail space eroding its top line and bottom line, investors would want to know if they can keep on relying on its dividends. (See also: Target Earnings Fall; Plans To Reduce Prices)
Target currently pays an annualized dividend of $2.40 a share, although it has only paid the quarterly equivalence of 60 cents per share for three quarters. So if there’s going to be a dividend raise this year, it’s likely to come in August.
Payout Ratio Is Likely To Increase In 2017
In its fiscal year 2016, its payout ratio — the portion of the net income paid in dividends — was 49.25 percent. That’s currently the highest payout ratio in the discount, variety stores industry. Wal-Mart Stores Inc. (WMT) comes second with a payout ratio of 45.4 percent.
Target said it’ll invest $1 billion in operating margins in a bid to reaccelerate growth at the company. It also said that it’ll make gross margin investments in order to have its items more competitively priced. If the initiatives drive more sales and result in higher net income, the company’s net income as a percentage of revenue will dip. By translation, unless its growth initiatives yield a respectable earnings growth or it retires more shares, it’s likely that Target’s payout ratio will move higher this year.
Mixed Free Cash Flow Profile
Target’s free cash flow also dipped with its earnings. It dipped by roughly 11.7 percent to $3.889 billion in 2016 from $4.406 billion in 2015. That meant that it paid roughly 34.7 percent of its free cash flow in dividends in 2016 versus the 30.9 percent free cash flow payout ratio in 2015.
It’s worth noting that the decline in Target’s free cash flow might not have been entirely due to the earnings dip. It also made some dividend-friendly decisions in in 2016. For instance, it invested about $3.706 billion in share buyback, $223 million higher than it invested on share buyback in 2015. This was obvious in that the dollar value of the dividend it paid in 2016 was lower than that of 2015, although it increased its per-share dividend pay. In addition, it retired $2.641 billion worth of long-term debt in 2016. It only reduced its long-term debt by $85 million in 2015.
Matthew Fassler at Goldman Sachs published a research note in January in which he downgraded TGT stock to a Sell. Fassler noted that the stiff and growing competition in the e-commerce space would require TGT to keep on investing in price and operating cost — exactly what TGT said it would this year. This could make TGT less profitable than ever, which is a dividend red flag.