Thursday, 13 December 2012

New Purchase - Target


Yesterday, I bought 50 shares of Target (TGT.NYSE) @ $60.65 ($60.45 + commission), for an initial yield of 2.37%.

This purchase will add $72 to my annual dividends. Below is my analysis of the stock.

Average Dividend Yield Analysis*

TGT
Year
High Price
Low Price
1Q
div.
2Q
div.
3Q
div.
4Q
div.
Annual Dividend
High Yield
Low Yield
2001
$41.74
$26.00
$0.06
$0.06
$0.06
$0.06
$0.24
0.92%
0.57%
2002
$46.15
$24.90
$0.06
$0.06
$0.06
$0.06
$0.24
0.96%
0.52%
2003
$41.80
$25.60
$0.06
$0.06
$0.07
$0.07
$0.26
1.02%
0.62%
2004
$54.14
$36.63
$0.07
$0.07
$0.08
$0.08
$0.30
0.82%
0.55%
2005
$60.00
$45.55
$0.08
$0.08
$0.10
$0.10
$0.36
0.79%
0.60%
2006
$60.34
$44.70
$0.10
$0.10
$0.12
$0.12
$0.44
0.98%
0.73%
2007
$70.75
$48.85
$0.12
$0.12
$0.14
$0.14
$0.52
1.06%
0.73%
2008
$59.55
$25.60
$0.14
$0.14
$0.16
$0.16
$0.60
2.34%
1.01%
2009
$51.77
$25.00
$0.16
$0.16
$0.17
$0.17
$0.66
2.64%
1.27%
2010
$60.65
$48.23
$0.17
$0.17
$0.25
$0.25
$0.84
1.74%
1.38%
2011
$60.97
$45.28
$0.25
$0.25
$0.30
$0.30
$1.10
2.43%
1.80%
2012


$0.30
$0.30
$0.36
$0.36
$1.32


2013


$0.36
$0.36
$0.36
$0.36
$1.44


Stock prices and dividends are per calendar year.
11y ave
1.43%
0.89%
Dividends are recorded in the quarter they were paid.
5y ave
2.04%
1.24%







3y ave
2.27%
1.49%







5y
$70.46
$116.01







3y
$63.43
$96.77






Super Cheap
$54.55


The table shows the 3 year average dividend yield to be 2.27% ((2.64% + 1.74% + 2.43%)/3). I use the numbers in the “High Yield” column for obvious reasons.

Using the current annual dividend of $1.44, one would have to pay $63.43 for a 2.27% yield.

Buying the stock at its low in 2009 would have earned you an initial yield of 2.64%. Using the current annual dividend, that corresponds to a stock price of $54.55 today (see “super cheap” price in the table above).

Graham Price

TGT’s 2009, 2010 and 2011 EPS were $2.86, $3.30 and $4.00. 3Y Ave EPS = $3.39.
TGT’s BV is $24.98.
Graham Price = SQRT (3Y Ave EPS * BV * 22.5) = $43.63

Cyclically Adjusted Price to Earnings Ratio

TGT’s 10Y Ave EPS = $2.68
CAPE = Stock Price / 10Y Ave EPS = $61.25 / $2.68 = 22.85
A CAPE below 20 is good.

Conclusion

TGT increased EPS from $1.51 in 2002 to $4.00 in 2011. That’s an increase of 2.6 times over 9 years. Not stellar, but not bad either.

Although the stock price is above Graham price, and above a CAPE of 20, it’s selling at a discount relative to the 3 year average dividend yield. This, combined with an average dividend increase of 18% per year over the last 9 years, convinced me to initiate a position.

I recently noticed that Passive Income Pursuit also bought stocks in Target.


*My method is not perfect as the stocks low price may have occurred before the annual dividend increase.

4 comments:

  1. Question - I was tinkering with using your three formulas yesterday for Baytex, a stock I own but is on my watch list to buy more. It came out well in two of the three, but seemed to fail the Graham test miserably. My question is whether the Graham methodology works as well for sectors that record and account for costs and revenues somewhat differently (I am thinking of energy and REITs for example). Regardless, what do you do when you find yourself in a situation such as this, where two of the metrics appear to suggest a buy, yet the other metric appears to be strongly in the opposite direction? Interested in your thoughts.

    ReplyDelete
    Replies
    1. That's a darn good question. Rarely do all three metrics agree. For all three to agree, there has got to be some serious issues surrounding a stock. That was the case when SLF plunged to $17 - unlike you, I chickened out - so yeah, there's some jealousy on both ends! In the end, 90% of my buys are based on the Average Dividend Yield. In my experience, when the book value of a company doesn't make sense, it's impossible to get a logical Graham price. Hope this helps.

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    2. That does help. Like so many investing questions (and beyond that sphere) the best answer also seems to often double as the least satisfying - "It depends".
      Will have to do a little more research on Benjamin Graham, as I know he is highly regarded by many. I just have not yet got around to it yet.

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    3. Sadly that is the staple answer for most investing questions.

      I like to compare the valuation across several different metrics to determine what a fair value price is. The more the better to help account for the outliers.

      Nice buy here. That's right around where my average price is. I'd be tempted to get some more should it decline back into the $50's.

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