The largest retailers in the US are a favorite choice for investors who want to keep some defensive stocks in their portfolios. Their wide economic canals, massive physical empires and increasing dividend payments have provided security that investors need in uncertain times.
If you're seeking refuge in this unpredictable economic environment, the stocks of two big-box retailers – Target (NYSE 🙂 and Costco Wholesale (NASDAQ 🙂 – are good opportunities. But what makes for a better bargain after their impressive run during the pandemic? Below we take a closer look.
Target: High Shopping Traffic
The COVID-19 pandemic caused an unprecedented increase in sales volumes for large box retailers as consumers replenished their pantries for extra trips to stores
But when you look at the stock performance of these companies, Target stands out as a clear winner. The stock is up more than 70% in the past year, much faster than the profits of the competitors.
The reason behind this force? Minneapolis-based Target has managed to keep its shopping traffic going strong. Many analysts believe that Target will be able to sustain its market share growth even after the pandemic has been contained.
His customers' willingness to keep coming to Target stores is the result of the efforts of Chief Executive Officer Brian Cornell. to make Target's outlets more attractive. He led the remodeling of hundreds of stores, introduced many affordable fashion brands and enhanced the retailer's e-commerce offering. During the pandemic, Target used its stores more as mini-distribution centers for its fast-growing digital business to better handle online orders.
This restructuring helped launch sales that far exceeded analyst expectations. Target's comparable store sales increased 24% in the second quarter, the fastest pace in the retailer's 58-year history, and almost three times higher than the average estimate.
In the third quarter, that measurement rose 20.7% from a year earlier, almost double the consensus estimate. The latest earnings, scheduled to be released on Tuesday, are likely to cap a double-digit fiscal year for the first time in 14 years.
With that growth momentum, investors who have invested in Target stock are also earning higher payouts every year. The company has steadily increased its dividend, which now yields 1.44%, every year for the past 49 years. At the same time, it maintained a very conservative payout ratio of 35.65%, a level below the industry average. The quarterly dividend of $ 0.68 per share is up more than 6% every year for the past five years.
Costco: A Solid Defensive Play
After hitting a record high in November, Costco stocks have since hit a bearish patch. That has led some investors to believe that the best days for these stay-at-home stocks are over.
The factors behind this downward movement include the prospects for economic reopening, which may reduce the need for stock drawers, along with the retailer's rising costs of fueling recent growth
In the period ending November, Costco made $ 212 million in spending fueled by higher wages during the pandemic. Costco said earlier this year that it would pay employees an extra $ 2 an hour, as well as incurring higher costs associated with ecommerce.
But Costco is still a solid, long-term defensive game in our opinion with its extensive retail network and subscription-based retail model keeping its revenues stable.
With a substantial portion of its business focused on selling goods at low profit margins, the department store shopping club has approximately 99 million members. In 2019, they paid the company $ 3.35 billion in membership fees alone. In total, the retailer generated annual sales of more than $ 160 billion.
This financial strength allowed Costco to reward shareholders with growing dividends. In November, the company announced a $ 4.4 billion special distribution. Per share, that works out to about $ 10 per share.
Despite Target's recent outperformance, it is only just catching up with Costco, which returned more than 150%, including dividends over the past five years. Many analysts believe that after the pandemic, Costco will get even stronger and bring even more benefit to savvy investors. Costco offers a quarterly payout of $ 0.70 per share at a current yield of 0.84%, which is up 12.7% annually for the past five years.
Bottom Line
We love both Target and Costco. Each is a reliable defensive stock that one could buy and hold.
That said, Costco is a better buy after its recent weakness and its potential for higher dividend increases in the future. Target, on the other hand, seems more vulnerable to a correction after such a massive rally.
