When analyzing a stock's potential, several factors need a closer look, including the total return (price appreciation and dividends). Total return can offer insights about a company's prospects and long-term earnings growth potential. It also comes into play when it's clear that a stock is lagging the overall market at a given moment.
The S&P 500 is up over 27% this year (through Dec. 6). However, that doesn't mean all its index components followed suit. Two S&P 500 components, Target (TGT 3.01%) and Lowe's (LOW -0.32%), have lagged the market by varying degrees so far in 2024.
While these two companies have had short-term hiccups in 2024, their long-term prospects still appear bright. As a result, this looks like an opportune time for investors to take a chance and buy shares of these two Dividend Kings.
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1. Target
Target made strides in 2024 in correcting an inventory imbalance caused by stocking up on too many discretionary spending items. What it couldn't account for was some recent sluggish quarterly sales. Target's fiscal third-quarter same-store sales (comps) increased 0.3% for the period that ended on Nov. 2. Positively, traffic to its stores and website was robust, responsible for a 2.4-percentage-point gain, but spending per visit subtracted 2 percentage points.
The weak comps appear to be due to a stretched consumer. Comps for everyday items like beauty, food, beverage, and household essentials had single-digit percentage increases. Discretionary categories like apparel and home furnishings appear to have dragged down sales. However, that's likely due to weary customers being stretched thin by higher prices for basic items. As these pressures ease, they should spend more on these items, and Target will undoubtedly benefit.
Meanwhile, the market reacted negatively to the recent quarterly results. Target's stock price is down 7% since the start of the year (through Dec. 6).
Fortunately, shareholders will continue to collect dividends while waiting for economic conditions to improve. Fortunately, Target has a deep commitment to making payments, as evidenced by its track record. The company has made a regular quarterly payout since its initial dividend in 1967, and has raised payouts annually for 53 straight years. That includes about a 2% increase, to $1.12 a share, starting in September.
Target can also afford the dividend and afford to keep raising it as its payout ratio is 47%. With the stock price down at the moment, the dividend yield is up to 3.4%, compared to the S&P 500's average of 1.2%.
2. Lowe's
Lowe's results haven't been immune from broad economic factors. Its fiscal third-quarter (which ended Nov. 1) comparable sales fell 1.1%. Management blamed the weak sales on customers' cautious spending on major home projects. Rival Home Depot faced similar challenges, and its quarterly comps dropped 1.3%. But it's only a matter of time before homeowners take on major projects either out of necessity or want.
Even with the sales drop, Lowe's share prices are still up nearly 23% so far this year (as of Dec. 6), trailing the S&P 500 by nearly five percentage points. But the market appears focused on recent results, giving long-term investors an opportunity to outperform.
Mortgage rates, which affect house purchasing activity and subsequent construction, have been dropping lately. The 30-year fixed mortgage rate has been under 7% for the last several months. Lower interest rates should also help finance existing homeowners' construction projects.
Lowe's has paid a quarterly dividend since its 1961 initial public offering (IPO), and it increased its quarterly payout by 4.5% earlier this year. It had free cash flow of $7.3 billion for the first nine months of the year. That easily supported the $1.9 billion it paid out in dividends.
