1 Green Flag for Target Stock Right Now

Key Points

• Supply chain issues, political stances, and a negative reaction to its incoming CEO have hurt the stock.

• The struggling retailer's continued ability to afford the dividend could ultimately help boost its stock.

• 10 stocks we like better than Target ›

When it comes to the current state of Target (NYSE: TGT) stock, any "green flags" may seem far from obvious. Supply chain challenges, consumer anger over the company's political stances, and the poor response to its CEO change are just a few of its more recent difficulties. Consequently, its stock is down by around 65% from its high in 2021.

Fortunately, such challenges have not overshadowed one benefit of owning share of this retailer, and that attribute could help bring about the stock's eventual recovery.

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Image source: Target.

Target's green flag

The green flag to owning Target stock is its dividend. At $4.56 per share annually, it offers new shareholders a dividend yield of 4.8%, which is four times the S&P 500 index average of 1.2%.

Moreover, Target has hiked its payout for 54 consecutive years, making it a Dividend King. This is critical because the Dividend King status attracts increased investor interest. Additionally, abandoning the dividend increase streak would almost certainly undermine confidence in the stock and lead to further declines.

Still, such a move is unlikely since Target can afford its payout. Over the trailing 12 months, Target generated $2.9 billion in free cash flow, well above the company's $2 billion dividend cost over the same period.

The stock's valuation may also affirm the opportunity. Its P/E ratio of 11 is far below Walmart's 37 earnings multiple, and the low valuation probably means Target's stock price already factors in its troubles. That will probably limit the downside of the stock and eventually increase the potential for stock price appreciation.

Indeed, Target has faced numerous difficulties in recent years, which may justify the drop in its stock price. Nonetheless, that has taken its dividend yield to high levels. When also considering the low P/E ratio, the company's ability to continue funding the payout, and the low likelihood of a dividend cut, the green flag that is its dividend may ultimately lead to a Target stock price recovery.

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