Lower tax rate could boost cash flows
Target’s (TGT) management didn’t disclose the possible benefit of the lower tax rate on its cash flows. However, it did state that the recently enacted tax reform legislation would result in higher cash flow generation, which could help the company boost its shareholder returns through share repurchases and dividends. It said it would also be able to support its growth initiatives, which could drive its sales and, in turn, its stock higher.
Target’s dividend growth rate fell in recent years
Target is a dividend aristocrat, which means it has a strong history of enhancing shareholder returns through higher dividends. But in recent years, its dividend growth rate has fallen (as you can see in the graph) due to pressure on its financials from sluggish sales and increased business investments.
Target raised its quarterly dividend by 3.3% in 2017, which reflects a steep decline from prior years. It returned $5 billion to its investors through share buybacks and dividends in fiscal 2017. But during the first three quarters of fiscal 2017, Target returned $1.8 billion to its shareholders through $1 billion in dividends and $0.77 billion in share repurchases.
With the anticipated benefit from the new tax reform legislation, the company could boost its shareholder returns through higher dividends and share buybacks.
Despite the challenges, Target has the highest dividend yield among its peers. It offers a dividend yield of 3.7% based on its closing price of $69.14 as of January 9, 2018. Walmart (WMT) and Costco (COST) have dividend yields of 2% and 1.1%, respectively.