It is always a good investment strategy to keep some defensive stocks in your portfolio. The retail sector offers some good options for long-term investors who buy and hold. With wide economic canals, huge physical empires and increasing dividend payments, these companies provide the security investors need in uncertain times.
If you're looking to diversify your portfolio by adding some solid retail stocks, the stocks of two major retailers — Target (NYSE:) and Lowe's (NYSE:) — are looking attractive again. But what better bargain offers after their impressive run during the pandemic? Below we take a look.
Target: Strong cash generation continues
The COVID-19 pandemic has fueled an unprecedented increase in sales volumes for chain stores as consumers replenish their pantry to avoid extra trips to stores.
]
But when you look at the stock performance of these companies, Target stands out as a clear winner. The stock has risen more than 60% in the past year, much faster than the gains made by its competitors. Yesterday Target closed at $245.81.
The reason behind this power?
Minneapolis-based Target has been able to keep its store traffic strong. But as the pandemic-driven boom cools and sales return to more normal levels, the chain is seeing some slowdown.
Same-store sales, a key measure of retail performance, rose 8.9% in the United States, narrowly beating a consensus estimate of 8.2%. That was less than half the profit compared to a year ago. Meanwhile, profit margins tightened and e-commerce revenues grew 10%, after nearly tripling a year ago.
However, that delay was highly anticipated given the highly unusual demand created by the pandemic. In the post-pandemic environment, Target is well positioned to take advantage of the recent restructuring of its stores, which the company is using as mini-distribution centers for its thriving digital business, to better fulfill online orders.
Target told investors in July that 95% of its total online sales were fulfilled by stores — a testament to the company's investment in integrating its 1,900 locations into its online supply chain.
With its unique online and physical integration, Target is also a great source of income. In June, the company announced a massive 32% increase in its quarterly payout to $0.9 per share. With that increase, 2021 is on track to be the 50th straight year in which Target has increased its annual dividend.
In a statement, Michael Fiddelke, chief financial officer said:
"Given our strong business performance and cash generation, our company is well positioned to support this strong dividend increase, even as we ramp up capital investments in our company and continue to invest in our team."
Lowe's: A Solid Housing Game
The home improvement giant, Lowe's, is another solid candidate to consider for long-term investors. The No. 2 home seller has outperformed the broader market this year, capitalizing on the home environment that prompted many Americans to put more money into their homes.
Analysts expect this trend to continue as we see more people move from the big cities to the less crowded suburbs, as working from home becomes the norm after the pandemic.
This de-urbanization, low interest rates and the massive savings Americans have amassed during the pandemic point to continued gains for home improvement stocks.
Last month, Lowe's reported better than expected and raised its sales forecast as it brought in more home contractor business. The North Carolina-based retailer said it expects sales of $92 billion this year, up from an earlier forecast of $86 billion.
During a conference call, CEO Marvin Ellison said:
"The pandemic has a long-term effect on the importance of the home, and we don't see that changing."
Yesterday, Lowe's stock closed at $206.15.
Like Target, Lowe's has also rewarded its investors with a monster dividend increase this year. It increased its quarterly payout in May by 33% to $0.80 a share. With an annual dividend yield of 1.57%, Lowe's remains in a strong position to further increase its payout, aided by its continued business momentum, growth trajectory and strong cash flow generation.
Bottom Line
We like both Target and Lowe's for long-term income investors. Each is a reliable defensive stock that investors can buy and hold. After seeing a major upward move during the pandemic, it is unrealistic to expect a similar increase in their stock prices going forward, but they still have enough growth momentum to offer returns that could beat the market.
