Target’s Credit Rating Cut, Are You Concerned?

Being a long-term investor with almost 20 years until I plan on retiring, I usually don’t give much stock to short-term issues and news that comes from my stock holdings. However I do subscribe to Seeking Alpha’s market current alerts so I can keep up with all the goings on with my investments. The majority of them don’t influence me much but are good to know to keep up with what my stocks are doing like acquisitions, share offerings or buyback announcements, and of course my favorite: dividend announcements, particularly those increase ones. 🙂

Yesterday I received this one in my e-mail: S&P cuts Target’s credit rating. The rating was cut from A from A+ due to a weak 4th quarter, which was highlighted by the data breach at their stores, resulting in 40 million payment card records being stolen. This combined with a more difficult than expected roll-out in Canada has dropped the stock from its 52 week high of $73.50 to its current $59.98 as of the close of Friday’s trading.

Since the data breach and weak 4th quarter results analysts and financial writers all over the internet have started predicting the eventual demise of the company. Although the short-term doesn’t look that great for the retail giant, I’m more concerned with where the company is going to be 5-10 years and more from now.

Despite having earnings fell to $3.07 in 2013 from $4.52 a year prior, free cash flow per share actually increased from $3.09 to $4.78, which is enough to cover the dividend and continue their 46 year history of raising the dividend. The increase in free cash flow per share is partly due to the firm’s share buyback policy which over the past decade has reduced the share count from 912 million in 2005 down to 642 million at the end of 2013. With earnings likely to be impacted in the short-term I expect them to slow down on the buyback so they can continue returning part of their free cash flow to shareholders. Their dividend growth should still be decent considering they had been increasing dividends by 21.4% over the last ten years. Even if it drops by half of that, I would still be happy as it would still be quite a bit above the rate of inflation.

Overall I believe Target (TGT) to be a buy today at these levels and I plan on continuing to dollar cost average into the stock in the coming months. As a dividend growth investor with a long-term investing horizon, I try not to worry too much about the short-term ups and downs of a company’s performance. Very few firms will ever grow linearly and never have any issues. A credit rating cut doesn’t look good for any company, but even with it, Target still has a good rating and one that is investment grade. Even though the Canadian expansion may not be going as well as hoped, I like that the firm is not standing pat and resting on their laurels and still looking to grow their business to better compete with others in their sector, like Wal-Mart (WMT).

While not a core holding for my portfolio, Target is one that makes a good complement to my other holdings and one I plan on holding a long time. Here are some links to places to further research Target and some recent blog posts on the stock if you want to look into the stock further.

Morningstar: Target

Reuters: Target

Why Did I Purchase this Dividend Paying Company For a Third Month in a Row? by Dividend Growth Investor

Recent Buy: Target by Dividend Mantra.

4 Reasons Why I Added Target To My Portfolio by Detail Investor @ Seeking Alpha.

Full Disclosure: I am long TGT and WMT. Please see my disclaimer page and do not take anything I said here as a recommendation to buy any stock. Always do your own research before buying.

What do you think of Target as a dividend growth investment? Do you have currently hold it in your portfolio and are you looking to add more with the recent weakness? Let me know in the comments below. 

2 comments

  1. SFZ,

    I’m not worried about a credit rating cut from excellent to great. I’d wonder how much this will cost them in interest carrying costs going forward, but other than that it’s a non-issue.

    As you mention, cash flow is still very robust and the dividend is well-covered. Although I like TGT here, my position is full. Otherwise, I’d be buying.

    Thanks for including my article! 🙂

    Have a great weekend.

    Best wishes.

    1. Jason,

      I agree it’s not really that big of an issue, just always amazes me how some people look at a short-term issue like this and then immediately think the stock’s just going to keep falling and it can’t recover. Seems like every time I get online I find someone predicting Target’s demise. Like you mention, it’s a great time to be buying and I plan on adding to my small position in the coming months.

      Thanks for stopping by and commenting, hope you enjoy the rest of your weekend as well.

      Best wishes,

      SFZ

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