On Friday I sold my remaining Novartis shares, and used the proceeds to buy Target. Novartis had been a great stock for me in terms of capital appreciation. I bought it at about $57 in early 2012, and sold the shares last week for just under $83. The issue I had was the yield, and my fear the stock price may have run a little ahead of itself. Factoring in the 35% Swiss dividend withholding tax, the yield was about 2.60% when I bought it. I was okay with this, but was counting on Novartis continuing with relatively sizeable dividend increases. Unfortunately, this did not happen. In 2012 the increase was in the neigorhood of 5%, and less than 3% last year. I am okay with these increases for stocks yielding 4%+, but at 2.6% at the time of purchase (and now 1.95%), I felt there were better places to put my money.
This leads me to Target. I know this is a favorite among dividend growth investors, but retail is a sector I am very wary of, and one of the reasons I don’t own Wal-Mart, Costco, etc. I am not overly concerned with Target’s recent data breach in the long-term, and the fact it badly botched it’s entrance into Canada is something from which I think they can recover. My concerns center on the competitiveness of the retail space in general, as well as the trend towards online shopping, which takes traffic (and wallets) out of bricks and mortar stores like Target.
That being said, I still decided to buy. I paid $60.80, which is about 20% less than the November 2013 price, so the valuation was attractive. While the move to online shopping is growing, it is still early days. Further, the victims will, initially at least, tend to be the poorer run retailers (“wounded zebra’s” if you will), not a category in which I slot Target. Moreover, Target seems to recognize this is an issue, and has indicated it will invest in its online platform. There is also no disputing Target’s long history of dividend increases, including annualized increases of approximately 19% in the last ten years, and 22% in the last five.
I was actually hoping to swap out Novartis for JNJ, but from a valuation perspective, JNJ is still a little high for my liking. If it some point it pulls back to an entry point I like, I will try to add it. In the interim, somewhat to my surprise, I am happy to be an owner of Target.