Down Over 22% in a Single Day, Is This Dividend King a Buy Now?

Target (NYSE: TGT) stock fell 22% on Nov. 20 after the retailer delivered worse-than-expected results for its fiscal 2024 third quarter (ended Nov. 2) and cut its fourth-quarter guidance.

That slump in share price pushed its yield from around 2.8% to as high as 3.7% in the past week. Better still, with 53 consecutive years of dividend raises, Target is a Dividend King -- an elite distinction awarded to those rare companies that have raised their dividends for at least 50 consecutive years. But is Target a buy now, or is its tempting dividend payout too good to be true?

Image source: Getty Images.

Target is developing a bad habit

Most Dividend Kings are stodgy, predictable companies that steadily grow earnings and, in turn, raise their payout gradually over time. But Target has developed a bad habit of being unpredictable.

I couldn't help but shake my head when I saw Target plunge last week because significant post-earnings movements have occurred too often in recent quarters. Over the last five quarters, its stock price has moved by an average of 14% the day after reporting earnings. Those kinds of moves are rare for other Dividend Kings like Coca-Cola or Procter & Gamble, even when they are facing their own challenges.

Target's latest post-earnings tumble wasn't even its biggest sell-off in the last few years: It fell 24.9% after reporting fiscal 2022 first-quarter earnings.

Data sources: Target, Yahoo Finance.

When a stock price shoots up after earnings, it usually indicates the company has performed better than expected. But it's a bad sign when a company has a steep sell-off after earnings because it can mean management did not do a good job forecasting its results. Granted, it's not always management's fault. Sometimes, investors bid up a stock in the days leading up to an earnings report, leaving it prone to a sell-off even if the results are as expected. But in just the past three years, Target has had eight quarters with post-earnings moves of 8% or more (in either direction).

A big-time guidance blunder

The recent quarter was yet another example of the company's struggle to provide accurate guidance.

When Target released its fiscal second quarter results on Aug. 21, it projected $2.10 to $2.40 in third-quarter adjusted earnings per share (EPS) and $9.00 to $9.70 in full-year adjusted EPS, up from its prior outlook of $8.60 to $9.60.

Just three months later, on Nov. 20, Target reported $1.85 in adjusted EPS, an 11.9% decline from the same period a year ago. And it cut its full-year earnings guidance to a range of $8.30 to $8.90 -- worse than its outlook prior to the August update.

So in just three months, the company went from a beat-and-raise quarter to a miss-and-lower quarter. Its guidance for the full year is now below the estimate it gave at the beginning of the year.

Management blamed supply chain challenges, port disruptions on the East Coast and Gulf of Mexico, weather, and softness in discretionary categories for the worse-than-expected results. The retailer was able to grow Target Circle membership and digital comparable sales by double-digit percentages, including its biggest Target Circle week yet. But on theearnings call Chief Commercial Officer Rick Gomez made a concerning comment that showed the downside of these promotions:

Consumers remain pressured but are willing to spend when they find the right balance of on-trend newness at compelling price points. They continue to make difficult trade-offs trying to save on everyday essentials to free up some of their budget for those new must-have items. We often describe consumers as resilient despite the challenges they are facing, and that is still true. However, I might add something to that description today. Beyond resilient, consumers have also become increasingly resourceful. They know there are deals to be found; they're willing to wait for sales and willing to search across multiple retailers to find them. For example, our Target Circle week this quarter was one of our biggest yet. However, we saw a more pronounced sales dip both the week before and the week after the event, showing just how planful consumers are in seeking out promotions when they shop. Similarly, we saw consumers lean into everyday essential stock-up promotions throughout the quarter to further stretch their monthly budgets.

Promotions can be great for drumming up foot traffic but not if they lower overall margins. The main reason why Target stock reached a multiyear low in Oct. 2023 was because it was pressured to cut prices after drastically mismanaging its inventory. Target will continue to have difficulty forecasting earnings if it can't get its pricing under control. The company can't control port closures or macroeconomic factors, so it must better manage inventory and pricing. Until it gets a firmer grip on these key factors, its guidance should be taken with a grain of salt.

Target is worth scooping out of the bargain bin

As bad as Target's results were, there are two factors that investors can take solace in -- its valuation and the strength of its dividend.

Management may have lowered its guidance, but this is still a highly profitable business. The midpoint of its updated EPS range is $8.60. Based on that estimate and the stock price at the time of this writing, Target has a price-to-earnings ratio of just 14.5. That's dirt cheap for a Dividend King.

As mentioned, Target also has an above-average yield of 3.6%. Its annual dividend payment sits at $4.48, giving it a healthy payout ratio as well.

Target is worth buying if you believe in the brand's strength and management's ability to eventually get a better handle on pricing and costs. The company isn't even at the top of its game, yet its earnings are high enough to warrant an attractive valuation.

The stock offers investors a sizable amount of passive income for investors to patiently wait for the business to improve. However, those who don't like volatility should steer clear of this stock until management improves its forecasting and limits the post-earnings swings that have become the new normal.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.