Target and Lowe’s: Slow Starts Amid Strong Foundations
When evaluating a stock’s potential, it’s important to consider total return, which includes both price appreciation and dividends. Understanding total return can shed light on a company’s future prospects and its capacity for long-term earnings growth. This insight becomes even more crucial when a stock is underperforming in the market.
The S&P 500 has surged over 27% this year as of December 6. However, not all companies are keeping pace with this growth. Notable underperformers include Target (NYSE: TGT) and Lowe’s (NYSE: LOW), both of which have lagged the market in 2024.
Despite facing short-term challenges, the long-term outlook for these companies remains positive. Investors may find this an appealing time to acquire shares of these established Dividend Kings.
Image source: Getty Images.
1. Target’s Recent Performance
In 2024, Target has worked to resolve an inventory imbalance caused by overstocking on discretionary items. However, the company faced challenges in its recent quarterly sales. In the fiscal third quarter ending November 2, same-store sales rose just 0.3%. Although store and online traffic contributed positively with a 2.4% increase, lower spending per visit negated some of these gains, subtracting 2 percentage points from overall sales.
The decline in comparable sales can be attributed to strained consumers. Sales for essential items, such as beauty products, food, and household goods, saw modest growth in the single digits. In contrast, discretionary categories like apparel and home goods have dragged down performance. This is likely a reflection of tighter budgets caused by rising prices of basic necessities. As inflationary pressures subside, consumer spending in these areas is expected to bounce back, favoring Target.
Following these results, the market responded unfavorably, leading to a 7% decrease in Target’s stock price year-to-date as of December 6.
Fortunately for shareholders, dividends continue throughout this waiting period. Target has maintained a strong dividend track record since its first payment in 1967, increasing payouts for 53 consecutive years. Recently, they raised the quarterly dividend to $1.12 per share, reflecting approximately a 2% boost. With a payout ratio of 47%, Target can comfortably sustain and grow its dividend, resulting in a yield of 3.4%, significantly higher than the S&P 500 average of 1.2%.
2. Lowe’s Market Challenges
Lowe’s has also faced pressure from broader economic trends. Its fiscal third-quarter results, which ended on November 1, showed a 1.1% decline in comparable sales. Management attributed these results to cautious spending among customers on significant home improvement projects. A competitor, Home Depot, reported similar challenges, with quarterly comparable sales down 1.3%. However, demand for home renovations is likely to rise in the future, whether out of necessity or desire.
Despite the dip in sales, Lowe’s stock has still appreciated nearly 23% year-to-date as of December 6, although it trails the S&P 500 by about five percentage points. Recent results may weigh on investor sentiment now, creating opportunities for long-term investors.
In a more positive note, mortgage rates have been falling, impacting home purchasing and construction activities. The 30-year fixed mortgage rate has remained below 7% for several months, which could incentivize homeowners to pursue construction projects.
Having paid a quarterly dividend since its IPO in 1961, Lowe’s increased its dividend payout by 4.5% earlier this year. With free cash flow totaling $7.3 billion in the first nine months, the company comfortably managed its dividend obligations amounting to $1.9 billion.
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Lawrence Rothman, CFA, does not hold any positions in the stocks mentioned. The Motley Fool owns shares in and recommends Home Depot and Target. The Motley Fool also recommends Lowe’s Companies. Please see the Motley Fool’s disclosure policy for further details.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
