"Prudent" Trio in Retailing

11/29/2016 9:00 am EST

Focus: STOCKS

Jason Clark

Contributing Editor, The Prudent Speculator

We continue to be enthusiastic about value investing as we move forward, given reasonable valuations, healthy balance sheets and solid dividend yields, notes Chris Quigley and Jason Clark; here, the contributing editors of The Prudent Speculator review two buy-rated retailers.

General merchandise discount store chain Target (TGT) expects to earn between $5.10 and $5.30 per share in fiscal 2017, a healthy increase from the guidance range of $4.80 to $5.20 issued in August.

The retailer repurchased $878 million worth of stock in Q3 and returned $345 million to investors via dividends. TGT will maintain its $0.60 quarterly dividend.

We believe that the retailer has plenty of wind left in its sails. We are fans of the company and are pleased to see some operational momentum coming back.

TGT shares trade for 14.2 times forward earnings and offer a dividend yield of 3.2%. Our Target Price has been hiked to $88.

While there is no doubt that office supply retailer Staples (SPLS) continues to face brisk headwinds, we are pleased to see the firm’s continued transformational progress.

We are most positive on its efforts to grow the profitable North America Commercial segment by focusing on mid-market customers (businesses with 10-200 employees).

While we accept that the retail business will be challenged to achieve growth anytime soon, it still generates a respectable $200 million in free cash flow making it the cash cow that can boost the firm’s investment in growth opportunities.

SPLS shares trade for less than 11 times next 12-month earnings expectations and offer a dividend yield of 5.0%. Our Target Price now stands at $13.

Shares of Wal-Mart Stores (WMT) were after the mammoth discount retailer’s quarterly financial release proved disappointing to some investors.

While the company is reaping some reward from key long-term initiatives and investments, those same investments continue to impact near-term profitability.

We think the firm’s purchase of Jet.com and its ongoing investment in e-commerce will make a long-term difference in performance, and we continue to like the international segment as well as the differing store concepts to capture additional grocery and urban market business.

WMT continues to generate strong free cash flow and remains committed to returning capital to shareholders via buybacks and dividends (the yield is currently 2.9%). Our Target Price remains $81.

Subscribe to The Prudent Speculator here…

Related Articles on STOCKS