Risk-averse investors often avoid individual stocks, even those of well-established, slow-growth companies like Target (NYSE: TGT). Indeed, no stock is risk-free, and even the top retailers cannot completely rule out the possibility of failure, even in the case of an established company like Target.
However, investors have several options for mitigating the worst effects of such possibilities, and with that, may have some incentive to take a chance on Target. Here's why investors should buy shares regardless of their risk tolerance, even if it could bring some initial discomfort if the stock falls further.
Image source: Target
The state of Target's stock
Admittedly, fears of falling stock prices are understandable given Target's performance over the last few years. The stock has dropped by nearly 40% over the past 12 months, and it's down 63% from its peak in 2021.
Tepid consumer demand has weighed on the stock, especially since, for a discount retailer, it tends to sell higher-end items compared to Dollar General or Walmart, for example. The company has also faced rising supply chain and digital fulfillment costs. The broad uncertainties revolving around new U.S. tariffs have likely put further strains on its supply chain.
Further, Target has managed to alienate some of its customers over its diversity, equity, and inclusion (DEI) policies, regardless of the stance it takes. Boycotts from the right over the chain's Pride merchandise contributed to a net sales decline in 2023. Net sales fell further in 2024. Then Donald Trump won the 2024 presidential election, which prompted Target in early 2025 to abandon its DEI initiatives and retreat from its prior stance of advocacy for racial and social justice. That sparked backlash and boycotts from left-leaning groups, which some view as the reason for the chain's steady declines in foot traffic since they began.
Nonetheless, investors have good reason to look at Target stock as a bargain rather than a falling knife. Politically motivated boycotts of companies tend not to last; the chain is likely to attract customers back as the political sentiment abates.
Also, Target operates nearly 2,000 stores across all 50 states, meaning it competes in most markets. Also, while its 0.1% comparable sales increase for fiscal 2024 was far from impressive, it at least indicates that the company continued to hold its own competitively. Thus, it is far too early to rule out a more robust recovery for the chain if business conditions improve.
Dividend stability
Investors can also mitigate the risk involved in investing in Target, even if they don't view the stock as "on sale," simply by virtue of how little or how much of their capital they choose to allocate to it. If one puts 5% of their portfolio value in Target, the worst that can happen in relation to that investment would be a 5% hit to their portfolio.
And a 100% drop in Target's stock price would be highly unlikely. One reason is Target's dividend. Aside from the fact that dividends tend to foster stability in investments, the $4.40 per share it pays shareholders annually gives it a dividend yield of 4.5% at the current share price. That's more than triple the S&P 500's current average yield of 1.3%. Shareholders are paid well for taking a chance on the company.
Additionally, Target has hiked its payouts for 53 straight years, making it a Dividend King. While management could cut those payouts at any time if financial circumstances required it, companies that walk away from such streaks tend to do long-term reputational damage to their stocks. That factor makes a dividend cut unlikely as long as Target can afford its payout.
On that score, there's not much for income investors to worry about. Target distributed just over $2.0 billion in dividends in 2024 -- far less than the $4.5 billion in free cash flow it generated. That should give it plenty of financial flexibility to keep up its payouts, and its annual dividend hikes.
Valuation
Furthermore, Target offers an advantage with valuation. Right now, it trades at a P/E ratio of 11, far below its five-year average of 19.
Indeed, its P/E ratio has not exceeded 30 since 2023 -- but one would have to go back to the 2008-2009 financial crisis to find an earnings multiple this low on Target stock.
Additionally, its valuation has generally lagged major competitors such as Walmart and Costco, and that gap is widening. In fact, so beaten down is the stock that its earnings multiple is below that of ultra-discounter Dollar General and peers such as BJ's Wholesale. That situation strongly suggests the stock is oversold, which reduces the likelihood of further significant downside from here.
Ultimately, Target has a lot to offer risk-averse investors who choose to put their worries aside and buy shares now.
Admittedly, the macroeconomic headwinds and supply chain challenges the chain faces should concern shareholders, and the company's shifting policies may have alienated shoppers on both sides of the political aisle. Nonetheless, last year's sales levels indicate the company was at least treading water, and conditions could improve if the economy recovers and tariff-related issues are resolved.
Finally, investors who buy now will receive impressive dividend payouts that will probably continue to rise. Considering that one can buy it at just 11 times earnings today, even the most risk-averse investors can probably feel comfortable about their prospects for earning significant returns from Target stock over time.
Should you invest $1,000 in Target right now?
Before you buy stock in Target, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Target wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider whenNetflixmade this list on December 17, 2004... if you invested $1,000 at the time of our recommendation,you’d have $642,582!* Or when Nvidiamade this list on April 15, 2005... if you invested $1,000 at the time of our recommendation,you’d have $829,879!*
Now, it’s worth notingStock Advisor’s total average return is975% — a market-crushing outperformance compared to172%for the S&P 500. Don’t miss out on the latest top 10 list, available when you joinStock Advisor.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.
