Like many industries, retail tends to be hit hard by recessions.
However, large retailers the goal (target 3.04%), walmart (WMT 0.33%)When costco wholesale (cost 0.58%) It has low profit margins and relies on higher trading volumes to make a profit. These companies will suffer during a recession. But Sophisticated Supply could be relatively wealthier than many others in the industry thanks to his chain and pricing power.
Costco’s stock jumped more than 7% on Jan. 6 after the company posted strong December sales. However, Target stands out as the best general retail stock to buy in 2023. This is especially true for investors who want to buy a company’s stock at a reasonable price and earn passive income through a reliable and growing dividend.
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Target’s profitability is shaken
Target’s stock is down 40% from its all-time high, even after surging more than 13% over the past two weeks. And for good reason. The company was caught off guard by inflation and changes in consumer behavior. In 2022, the company reported disappointing quarterly results and admitted its forecasts underestimated the impact of rising costs.
Target was unable to offset higher costs with price increases, resulting in a significant decline in operating margins. The goal is that in just one year he went from his 10-year high operating margin to his 10-year low. Its operating profit margins now approach those of Walmart and Costco.
TGT Revenue (TTM) Data by YCharts
reasonable evaluation
In the long run, Target can’t afford to do business with such low margins because it doesn’t have the sales volume to support it. more than double. To match Costco’s operating profit, Target needs to double his operating profit margin. And to match Walmart, you need an operating margin of about 20%.
If Target were rated the same as Walmart and Costco, this would be a big problem. But it’s a much smaller company with a market capitalization about one-third that of Costco and one-fifth that of Walmart.
TGT market cap data by YCharts
If the target can get back to its 6.7% median 10-year operating margin, the stock will start looking incredibly cheap. However, it still trades at 29 times his price-to-earnings ratio. This isn’t too bad considering the business has endured a collapse in revenue and operating margins.
passive income machine
Target relies more on discretionary spending than Walmart or Costco, making its results more volatile and likely subject to economic cycles.
But even as the company faces a myriad of challenges, Target remains highly profitable and could support increasing dividends. Dividends are an important aspect of Target’s long-term investment theme. The 2.7% yield is much higher than Walmart’s 1.5% yield and Costco’s 0.7% yield.
Target is also a dividend king. S&P 500 A component that has paid and increased dividends for at least 50 consecutive years.
Cyclic companies with a track record of consecutive dividend increases, regardless of market cycles, are among the best stocks to own for the long term. That’s because even in a recession, investors can count on a passive source of income that incentivizes holding through volatility. Also, when expanding, the company can make very large profits that can be reinvested in the business or used to improve its balance sheet.
The target is a balanced purchase
In the short term, Target’s prospects are no worse than Walmart and Costco. Longer term, however, the company’s profit margins should improve and could stand out as the clear winner in this three-company set.
Costco has historically been the fastest growing company of the three. But it’s also the most expensive and pays too little in dividends to be considered a reliable source of passive income. can.
Walmart is a slow growing, trustworthy business. The company is one of the strongest retailers in the world and can easily beat its competitors. However, it is also an expensive stock with a low dividend yield. Investors can find equally strong companies with lower valuations and higher dividend yields.
Target offers investors the best balance of the three stocks. With typically high operating margins, strong brands, reasonable valuations and solid dividends, growth, value and earnings are a perfect match.
Target could well underperform Walmart and Costco in 2023.
Daniel Foelber has no positions in any of the stocks mentioned. The Motley Fool US headquarters has positions in and recommends Costco his Wholesale, Target and Walmart. The Motley Fool’s U.S. headquarters has a disclosure policy.
