3 Reasons I Bought Target Stock This Month

By Rick Munarriz Markets Fool.com

Target (NYSE: TGT)may be more cheap than chic these days, and that's just fine by me. After shopping at Target for a couple of decades, I finally became a shareholder in the discount retailer earlier this month.

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I consider this an opportunistic purchase. The stock was slammed late last month, after the company posted unsettling financial results for its fiscal fourth quarter. Revenue and earnings fell short of Wall Street expectations, and Target posted negative comps.

Target also conceded that it will lower prices to win back shoppers, something that's going to weigh on the chain's margins. With Target set to remodel 600 stores and invest in a dozen new brands, the next few quarters may be rough on the bottom line. Investors and analysts pounded the stock following the unsettling quarterly report, but the sell-off made the stock too tempting to ignore.

I'm a Target shareholder now, and I want to tell you the reasons I went for this contrarian play.

Black Friday wasn't enough to save Target over the holidays. Image source: Target.

1. The valuation is attractive

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Target wasn't at its best over the holidays.Fourth-quarter sales fell by 4.3%, partly as a result of the removal of pharmacy and clinic sales, but also a 1.5% dip in comps. Comparable online sales soared 34%, but that's baked into the physical-store comps. Back out the digital channel sales, and store-level comps would've taken a 3.3% hit.

The discounter doesn't see comps turning positive in the near term. Target's forecasting a decline in same-store sale in the low single digits. It sees adjusted earnings per share clocking in between $3.80 and $4.20 a share. Target's now trading at 13.6 times the midpoint of its challenging earnings.

Target had to discount aggressively to keep customers close over the holidays, including an unprecedented sale with 15% off nearly everything online and offline on the Sunday of Thanksgiving weekend and Cyber Monday. The chain is still an aggressive promoter, but that means its results are weighed down by recent margin-gnawing initiatives.

Target posted adjusted earnings of $5.01 a share last year, so if it's reasonably priced at 13.6 times forward earnings, it's downright cheap at 10.9 times earnings. If that's a compelling value, stick around. It gets better.

2. Returning money to shareholders is paying off

There's a quarterly reward for being a Target shareholder, and it comes in the form of a fat dividend check. Target stock is yielding a hearty 4.4%.

Target is a dividend-paying aristocrat. You have to go all the way back to fiscal 1994 -- 22 years ago -- to find the last year it didn't boost its rate. The dividend has grown from $0.14 a share for all of 1994 to $2.32 a share last year. Even through retail lulls and the global recession of 2008, Target found a way to keep the disbursements rising. Rising dividends and a falling price will translate into bigger yields, and that should provide some downside protection.

Dividends aren't the only way Target is returning money to its stakeholders. It's also an aggressive buyer of its stock. Its board approved a share buyback in 2012 that was expanded to $10 billion in 2015. It completed that buyback late last year, and now it's eating away at a new $5 billion buyback authorization.

Now, critics will point out that recent purchases have happened at higher price points. There's no denying that. However, reducing its share count is also accretive to earnings on a per-share basis. Let's check out the $3.36 billion in reported earnings it scored in fiscal 2015, translating to net income of $5.32 a share once divided by its 632.9 million fully diluted shares. Divide $3.36 billion by the 564.5 million fully diluted shares in its most recent quarter, and we'd be looking at earnings of $5.95 a share. In short, as earnings stabilize, we're looking at an earnings multiple in the single digits with the lower share count.

3. Target knows how to bounce back

Target's been a pretty consistent grower. Annual sales have declined just three times over the past 23 years according to data fromS&P Global Market Intelligence. The first two times that sales fell -- including during the data-breach hack during the 2013 holiday shopping season -- it bounced back the following year.

Last year was the third year, and we'll have to see if history repeats or Target does something unfortunate that it hasn't done in at least two dozen years, by reporting back-to-back years of declining sales. My money's on history. My money's on Target's future.

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Rick Munarriz owns shares of Target. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.