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The 7 Best Discount Retailers: Finding Value & Dividends Among Bargain Stocks

By Sure Dividend. Originally published at ValueWalk.

Discount retail stocks, much like the goods that fill their stores, are on sale.

Can You Research Everything About A Company?

In case you haven’t heard, e-commerce retailers led by (AMZN) are taking over the world. But in case that doesn’t come to fruition, many dividend-paying discount retail stocks could be attractive.

Internet retail is indeed gaining market share from brick-and-mortar retailers, but plenty of retailers with a physical presence will survive the e-commerce onslaught.

Plus, income and value investors may be reluctant to invest in Amazon, which is certainly understandable.

Amazon is inconsistently profitable, the stock trades for a price-to-earnings ratio of nearly 200, and there is little-to-no hope of receiving a dividend from Amazon any time soon.

As a result, dividend investors may want to consider the following seven discount retail stocks. They are ranked in order of their appeal, based on their business models, valuations, and dividend yields.


#1 Discount Retail Dividend Stock: Target (TGT)

Dividend Yield: 4.8%

Target takes the top spot on this list, because it is a compelling opportunity on valuation and income potential.

Not only does the stock trade for a price-to-earnings ratio of 10, but it also offers a nearly 5% dividend yield.

And, Target recently raised its dividend by 3.3%, marking the 46th consecutive annual dividend hike.

Target is a Dividend Aristocrat, a group of just 51 stocks in the S&P 500 that have raised dividends for 25+ consecutive years.

You can see the entire list of 51 Dividend Aristocrats here.

Of course, the reason why the stock is so cheap, is because investors are in full-blown panic mode. Target shocked investors when it revised 2017 guidance earlier this year.

The company announced it would invest as much as $2 billion in strategic initiatives, including store redevelopments, investments in digital capabilities, and investments in lowering prices.

This will be an anchor on financial performance this year—Target expects full-year adjusted earnings-per-share will decline 20% at the midpoint of guidance—but the invesmtnets lay the groundwork for better performance over the long term.

That, along with the intensifying pressure from Amazon, have caused Target shares to plunge nearly 30% just since the beginning of 2017.

However, these fears may be unfounded.

Target is investing to renovate existing stores, and add new stores in an emerging segment—small stores.

Interview With Sandy Mehta, CFA – CEO Of Value Investment Principals Ltd.

First, Target is making a major investment in redeveloping stores, to improve their appearances and functionality to better perform in a multi-channel retail landscape.

The company expects to renovate over 100 existing stores this year. Next year, the number of reimagined stores will exceed 350, and will exceed 600 by 2019.

So far, the company projects a 2%-4% sales lift per reimagined store.

Can You Research Everything About A Company?

Under the CityTarget and TargetExpress banners, these small stores are perfectly suited for urban areas and college campuses, where Target did not have a heavy presence previously.

Target plans to triple its small-store count over the next few years.

TGT Small Stores

Source: Q4 Earnings Presentation, page 77

The small-store expansion is progressing rapidly: Target had 32 small stores in operation last quarter. By the end of this year, Target plans to have more than 60 such stores in operation.

By 2019, there will be more than 100 small stores in operation.

Target has a huge store footprint, consisting of 1,800 stores across the U.S.

This enables faster rollout of its own e-commerce business. For example, 80% of e-commerce orders received on Christmas Eve last year were processed through a store.

Target’s massive store count provides for improved online order fulfillment, which will allow shoppers to pick-up items in a store, as fast or faster than at-home delivery.

Last quarter, approximately 95% of in-store pick up orders were ready in an hour or less. Target’s digital sales increased 22% for the quarter.

With a nearly 5% dividend yield and growth in e-commerce and new store concepts, Target is a very attractive stock for value and income.

S&P 500 Companies Pile On Debt Amid Low Rates

#2 Discount Retail Dividend Stock: Wal-Mart (WMT)

Dividend Yield: 2.7%

While Amazon dominates the news headlines, Wal-Mart remains the biggest retailer in the world, with nearly $500 billion in annual sales.

There is arguably no company better positioned than Wal-Mart to take on e-commerce. That’s because of Wal-Mart’s unparalleled store count and distribution network.

Wal-Mart is simply a cash cow—free cash flow increased 34% in fiscal 2017, to $21 billion. Free cash flow rose at a double-digit annualized rate over the past few fiscal years.

Discount Retailers

Source: Raymond James Institutional Investors Conference, page 5

According to the company, Wal-Mart stores are located within 10 miles of approximately 90% of the U.S. population.

Wal-Mart can exercise a great deal of influence over its suppliers, to lower prices in order to compete with Amazon.

Plus, its massive footprint allows the company to easily pursue e-commerce, either by investing in its own distribution centers, or by making significant acquisitions.

For example, Wal-Mart acquired e-commerce giant for $3.3 billion, and acquired a 10% investment in China-based e-commerce site

More recently, Wal-Mart acquired men’s online retailer Bonobos for $310 million.

E-commerce will gradually play a more important role for Wal-Mart over time.

WMT Strategy

Source: Raymond James Institutional Investors Conference, page 12

These investments are gaining momentum. Wal-Mart’s e-commerce sales rose 22% in fiscal 2017, to $15 billion. U.S. sales increased 3.2%.

The new fiscal year is off to a bang.

Last fiscal quarter, e-commerce sales rose over 60% from the same quarter last year. This drove a 1.4% increase in U.S. comparable sales for the quarter.

Rising domestic comparable sales, which measures sales at stores open at least one year, is a good sign for Wal-Mart that the brand is regaining strength.

Wal-Mart’s diversification has also helped so far this fiscal year.

In addition to its core U.S. business, Wal-Mart also has a sizable international presence, as well as a warehouse club operation under the Sam’s Club banner.

These complementary businesses boosted Wal-Mart last quarter. Excluding currency impacts, international sales rose 0.8% last quarter.

Comparable sales increased 1.6% at Sam’s Club not including fuel, which was a massive increase in sales growth from previous quarters.

Wal-Mart certainly has the financial strength to compete with Amazon on price and e-commerce. And, its massive cash flow allows it to raise dividends each year.

Like Target, Wal-Mart is a Dividend Aristocrat. It has raised its dividend for 44 years in a row.

Discount Retail Dividend Stock #3: Costco (COST)

Dividend Yield: 1.2%

Costco has a low dividend yield, but it makes up for this with very high dividend growth rates.

On April 25th, Costco raised its regular cash dividend by 11%.

Costco is a Dividend Achiever, a group of 265 stocks with 10+ years of consecutive dividend increases.

You can see the entire list of all 264 Dividend Achievers by clicking here.

Even better, Costco pays a special dividend on occasion. Costco also declared a special dividend of $7 per share for 2017.

Special dividends are not guaranteed from year to year, but Costco has paid three special dividends in

The post The 7 Best Discount Retailers: Finding Value & Dividends Among Bargain Stocks appeared first on ValueWalk.

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