Target Dividend Hike Goes To Industry Premium on Payouts (TGT, WMT, COST)

Target Corp. (NYSE: TGT) did manage to deliver on a dividend hike today.  It is not very fun to claim, but the 20% hike creates a small analysis situation when you consider that Target wants to grow its dividend much more in the coming years.  The dividend hike takes the near-2% dividend yield to about 2.4%.  That only about matches the yield from its nemesis Wal-Mart Stores Inc. (NYSE: WMT) even if this payout rate hike is much more than we can expect from Wal-Mart these days.

When you tally up the 20% rate hike, the dividend goes up to $1.44 per year and the formal dividend yield based on a $58.30 share price would actually be 2.47% on a rounded basis.  Target has been buying back its stock and has committed to its holders that it wants to boost its dividend considerably more in the years ahead.

It does not seem that Target would need a massive amount of capital to keep running just fine as long as it has access to low-rate lines of credit.  The $1.44 per year payout compares to Thomson Reuters estimates of $4.32 EPS for this year and $4.87 EPS for next year. That income payout ratio is 33.3% or one-third of income on a normalized (non-GAAP) basis for this year.  The question comes up now about how much Target can raise its payout and its payout ratio in 2013 because earnings growth is expected to be 12.7% in 2013 over this year, so another 20% dividend payout rate hike would mean that Target decided to increase its payout ratio too.

Frankly, this will be an ongoing dividend hike story unless things really fall apart in the economy.  The question is how much of its income it wants to pay out ahead.  Wal-Mart raised its dividend two quarters ago and ist dividend payout ratio for this year is effectively 32.3% based upon the $4.91 EPS target from Thomson Reuters.

Both companies may envy the business growth and valuation of Costco Wholesale Corporation (NASDAQ: COST) but its dividend yield is only 1.3% and it trades with a much higher multiple of earnings. Costco pays out about 28% of its expected earnings for this year.

Target wants to grow its dividend much more over the next five years but it is now paying out a premium to peers when it comes to its dividend coverage ratio.

JON C. OGG