Published on August 6th, 2022, by Felix Martinez
There is no exact definition for blue chip stocks. We define it as a stock with at least ten consecutive years of dividend increases. We believe an established track record of annual dividend increases going back at least a decade shows a company’s ability to generate steady growth and raise its dividend, even in a recession.
As a result, we feel that blue chip stocks are among the safest dividend stocks investors can buy.
With all this in mind, we created a list of 350+ blue-chip stocks, which you can download by clicking below:
In addition to the Excel spreadsheet above, we will individually review the top 50 blue chip stocks today as ranked using expected total returns from the Sure Analysis Research Database.
This article will analyze Target Corporation (TGT) as part of the 2022 Blue Chip Stocks In Focus series.
Business Overview
Target was founded in 1902 and is a discount retail giant. It has a market capitalization of over $77.03 billion. Today, it operates approximately 1,850 stores in the U.S., as well as an e-commerce business, which offers general merchandise and food and serves as distribution points for the company’s burgeoning e-commerce business. It has a diverse product lineup, with more than $104 billion in annual sales.
The company reported first-quarter earnings on May 18, 2022. Sales grew by 4% for the quarter compared to the first quarter of 2021. However, operating income was down 43.3% year-over-year. This brought down net income by 51.9% compared to the first quarter of 2021.
Earnings per share for the quarter were also down. Earnings were $2.16 per share compared to $4.17, which decreased 48.2% year-over-year.
Comparable sales grew 3.3% in the first quarter, reflecting comparable store sales growth of 3.4% and comparable digital sales growth of 3.2%.
The first quarter operating income margin rate was 5.3% in 2022, compared with 9.8% in 2021. The first quarter gross margin rate was 25.7%, compared with 30.0% in 2021.
This year’s gross margin rate reflected higher markdown rates, primarily driven by inventory impairments and actions taken to address lower-than-expected sales in discretionary categories, as well as costs related to freight, supply chain disruptions, and increased compensation and headcount in our distribution centers.
Source: Investor Presentation
Growth Prospects
Despite the coronavirus pandemic and supply chain issues, target performed better in 2021 than in previous years. If anything, Target benefited from the pandemic as it forced more consumers to stay home and stockpile goods.
The biggest reason for this extraordinary growth is that Target has invested heavily in growing new sales channels, which have paid off. First, Target has invested heavily in e-commerce. The rise in e-commerce initially caught many retail companies, including Target, flat-footed. Target has revamped its online offerings and has seen incredible growth rates.
Over the past ten years, earnings growth has a Compound Annual Growth Rate (CAGR) of 9.5%. However, most of this growth has come from the last four years. For example, over the past five years, the company’s earnings have had a CAGR of 17.7%.
We expect the company to continue to grow earnings at an 8% rate over the next five years.
Source: Investor Presentation
Competitive Advantages & Recession Performance
Target operates in a challenging industry. Retail is highly competitive. For consumers, retail brands often take a back seat to price and convenience.
This is why Target has invested so heavily in store redevelopment. That has enabled the company to retain its brand strength, even in a fiercely competitive industry. Most importantly, it has massive distribution and scale capabilities, which allow it to keep prices low.
In addition, Target operates in a defensive niche of the retail business. Discount retail tends to hold up relatively well during economic downturns when consumers will typically shift from higher-priced retailers.
You can see a rundown of Williams Sonoma Inc.’s earnings-per-share from 2007 to 2011 below:
- 2007 earnings-per-share of $3.33
- 2008 earnings-per-share of $2.86 (14% decline)
- 2009 earnings-per-share of $3.30 (15% increase)
- 2010 earnings-per-share of $3.88 (17% increase)
- 2011 earnings-per-share of $4.28 (10% increase)
Target was remarkably resilient during the Great Recession. It suffered a 14% decline in 2008 but followed this with three consecutive years of double-digit earnings growth. Target again performed very well in 2020, a year in which the U.S. economy entered a recession due to the pandemic. And yet, Target continues to increase its dividend reliably each year, including a 20% hike in 2022.
Valuation & Expected Returns
The company looks to be slightly undervalued right now. Over the past ten years, the company has tended to have an average PE of 15.4x earnings. At the current price, the company’s current PE is 15.1x earnings. Thus, we expect a 1.5% annual return from a valuation tailwind.
However, because of the recent earnings growth and expected annual earnings growth of 8% over the next five years, we think that a PE of 17x earnings is more suitable for this solid company.
This will provide a tailwind of about 5% based on valuation. Also, if we add the current dividend yield of 2.6% and the expected earnings growth of 8%, we can expect a total annual rate of return of 15.6% over the next five years.
Final Thoughts
We see Target as undervalued following recent weakness in the stock. Given explosive earnings growth in 2020 and more of the same in 2021, we see diminished growth potential moving forward. We forecast total returns at 15.6% annually. The yield is now higher given the decline in the share price, but the dividend increase streak is impressive and should provide many more years of payout growth. We rate the stock a buy at the current price.
The Blue Chips list is not the only way to quickly screen for stocks that regularly pay rising dividends.
- The Dividend Aristocrats: S&P 500 stocks with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the Dividend Aristocrats with the highest current yields.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 44 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks: Monthly dividend stocks with the highest current yields.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Complete List of Russell 2000 Stocks: arguably the world’s best-known benchmark for small-cap U.S. stocks.
- The Best DRIP Stocks: The top 15 Dividend Aristocrats with no-fee dividend reinvestment plans.
- The 2022 High ROIC Stocks List: The top 10 stocks with high returns on invested capital.
- The 2022 High Beta Stocks List: The 100 stocks in the S&P 500 Index with the highest beta.
- The 2022 Low Beta Stocks List: The 100 stocks in the S&P 500 Index with the lowest beta.
