This Household Name’s Cash Flow Is Plunging… Is Its Dividend Next?

Shares of Target Corp. (NYSE: TGT) lost half their value between November 2021 and June 2022.

Target took more punishment than most stocks during the bear market because it overestimated consumer demand. That meant the retail giant had excess inventory and had to lower its financial guidance.

The lower price has lifted the dividend yield, so long-term dividend investors may now be considering the stock due to its 2.5% yield.

But is the dividend safe, or will Target’s misfires result in a dividend cut?

The following chart is not the kind you want to see when looking at a company’s free cash flow.

Target’s free cash flow is forecast to get just about halved next year, going from $5.1 billion in 2022 to $2.7 billion in 2023. If that does happen, Target’s free cash flow will have made a round trip, going from $2.5 billion in 2019 to a peak of $7.9 billion in 2021, before falling back below $3 billion in 2023.

However, the situation is not dire.

The payout ratio in 2022 will be around 30%. Even with the drastic decline in free cash flow expected in 2023, the payout ratio is projected to then be 64%, which is still within my comfort zone.

A big positive for Target’s dividend safety grade is the fact that the company has raised its dividend every year for 55 years. That is an exceptionally long track record that management will not want to disrupt.

The falling free cash flow is concerning, but as of now, Target’s more than five-decade history of raising its dividend, plus its current low payout ratio, means that the dividend won’t be in jeopardy anytime soon.

Dividend Safety Rating: B

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Good investing,

Marc