Better Buy: Target at an All-Time High or a 50/50 Split of Costco and Walmart?

Investors appear more hopeful about Target (NYSE: TGT) stock than they have in years. Its former COO, Michael Fiddelke, became the CEO in February, and amid efforts to upgrade its stores and supply chains, its stock is up by nearly 65% from its 52-week low.

Such changes serve as an incentive to choose Target over a 50-50 split of its closest competitors, Walmart (NASDAQ: WMT) and Costco (NASDAQ: COST). However, investors should note that Target stock trades at a discount of almost 50% to its 2021 all-time high. The question for investors is whether Target would remain the stock of choice if it returned to that high. Let's take a closer look.

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How Target stands out

Target stock is up because it had long been priced as if it were headed into permanent decline. Even after the aforementioned 65% gain, it sells at a price-to-earnings (P/E) ratio of 18. This is well below Walmart and Costco, which trade at 40x and 48x earnings, respectively.

Moreover, Target also stands out for its dividend. It just boosted its payout for the 55th straight year, earning it the title of Dividend King (any company that has increased its annual dividend for at least 50 consecutive years). Even after the recent gains, its dividend yield is 3.4%. That is far above the S&P 500 average of 1.1%. Also, since Walmart and Costco yield 0.8% and 0.6%, respectively, it is likely the only one of these stocks that most income-oriented investors would consider buying.

Furthermore, Target would stand out in both respects even if its stock price returned to all-time highs. At approximately twice the stock price, Target would presumably have a 36 P/E ratio, below Walmart's and Costco's current multiples. Additionally, even if a doubling of the stock price halves Target's dividend yield, a 1.65% return keeps its yield well above competitors'.

Why investors might turn on Target stock at record highs

Nonetheless, investors should remember that Target stock likely became cheap for understandable reasons. After the pandemic, Target faced chronically high inventories when supply chains broke down and the company often stocked products that consumers did not want.

Furthermore, Target put off some of its customers by allowing stores to become disorganized. It also managed to alienate both left-leaning and right-leaning consumers when it took some controversial political stances.

Those factors probably played a role in its three straight years of net sales declines, including a 2% drop in fiscal 2025 (ended Jan. 31). In comparison, both Walmart and Costco reported robust sales growth over the same period.

Target boosted investor optimism when it reported 7% year-over-year net sales growth in the first quarter of 2026 (ended May 2). That closely matched Walmart's net sales growth, though it remained below Costco's 10% net sales growth during the same time frame.

Still, one quarter does not constitute a trend, and net earnings fell 25% over the same period amid higher capital spending. That profit decline occurred as Target plans to spend around $5 billion over the coming years (including $2 billion this year) on store, supply chain, and merchandise improvements. Thus, investors will have to wait to see if Target can sustain its improvements.

Can Target remain a better buy at all-time highs?

Considering the state of all three companies, Target could remain the stock of choice above a 50-50 split of Walmart and Costco even at all-time highs.

Target's efforts to compete and strong performance in fiscal Q1 have investors viewing the company in a positive light. Its lower P/E ratio and higher dividend mean it is more likely to drive higher investor returns than Walmart and Costco at current prices.

I believe that the investment thesis will also stand if Target reaches record highs. The potentially lower P/E ratio and higher dividend yield would likely stand under such conditions. Moreover, it is unlikely to reach record highs without adequately addressing the previously mentioned supply chain, merchandising, and corporate image issues, making those factors less significant if Target returns to its all-time high.

Ultimately, these conditions give Target stock a significant runway for gains from current prices. Assuming Target can continue matching Walmart's sales growth while offering a lower valuation and a higher dividend yield than both Walmart and Costco, it should stand out as the more attractive retail stock to buy.

Will Healy has positions in Target. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.