When it comes to dividend stocks, Coca-Cola is a model of consistency, having increased its dividend for 62 consecutive years. Coke’s track record of increasing dividends, 3.1% yield, and recession-resistant business model makes it one of the safest passive income games over there. But there may be an even better Dividend King to buy now.
Target (NYSE:TGT) has made a real comeback since crashing to a three-year low in early October 2023. But the stock has cooled off recently, falling 13% over the past three months. Here’s why Target isn’t out of the woods yet, why the dividend stocks could remain under pressure and why it’s ultimately worth buying now.
Target has been on a roller coaster ride
The target hit a record high in 2021, as spending on goods increased during the height of the COVID-19 pandemic. Target’s investments in curbside pickup and e-commerce helped the company post a record profit of $6.95 billion in fiscal 2021, despite challenges with in-store shopping.
But Target overestimated demand trends, particularly for discretionary goods. To be successful, retailers must manage inventory effectively and present a product line that resonates with customers. Stocking too little inventory can compromise sales, while having too much inventory or displaying the wrong products can impact profits.
Target reduced its inventory from $12.6 billion in the first quarter of fiscal 2023 to $11.7 billion in the first quarter of fiscal 2024. Its inventory hit an all-time high of $17.1 billion in the third quarter of fiscal 2022 and are now down 26%. from this level.
A combination of deep discounts (especially through its Target Circle loyalty program) and leaner operations have helped Target reduce its inventory. The efforts paid off, as Target’s trailing 12-month operating margin improved to 5.3%, compared to 3.5% a year ago.
During Target’s first quarter fiscal 2024 earnings call, CFO and COO Michael Fiddelke discussed improving inventory and noted that sales have now outpaced growth stocks over the last five years:
Looking at the first quarter of 2019, total inventory increased about 30% over those five years, while sales in the just-ended quarter were about 39% higher than in 2019 Given that this sales growth was largely driven by an increase in our sales per store, an increase in our inventory turnover is something we expect to see and should be sustainable over time.
Target does a better job stocking high-volume items. During the most recent quarter, the company reduced its out-of-stock rate on its top third of items by 4% compared to the same quarter last year. Maintaining high-quality inventory and stocking high-demand items will be critical for Target to return its operating margin to its pre-pandemic range of 6-7%.
Cracks among consumers
Better aligning its inventory with consumer trends was a step in the right direction for Target. But the company is…
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