Walmart’s business model is working much better in the current economic environment.
Walmart (WMT -0.65%) hit a fresh all-time high on Friday and is now up more than 24% year to date. Target (TGT 1.44%) has been on a great run since early November, but the stock is now up just 2% year to date after selling off heavily in response to its first-quarter 2024 earnings.
Let’s examine what’s working for Walmart and not working for Target to see which is the better dividend stock to buy now.
Image source: Getty Images.
Follow the numbers
Target and Walmart were hit hard by supply chain challenges, inflation, and a pullback in consumer spending on discretionary purchases. Walmart’s product mix is more focused on staples than Target. Walmart has a full grocery store and a value proposition centered around low prices. So, naturally, it was better prepared for present market conditions. But Walmart also did a better job managing inventory and forecasting buyer behavior. It suffered a far less severe decline than Target.
WMT Revenue (TTM) data by YCharts
As you can see in the chart, Walmart has consistently grown sales despite these challenges, and its operating margin has almost entirely rebounded. Meanwhile, Target enjoyed massive sales and margin growth during the early part of the pandemic, but has since experienced flat sales growth and a steep decline in margins that it is still recovering from.
Walmart’s strategy is based on ultra-high sales volume and low margins, whereas Target depends on a superior in-store shopping experience to justify a more expensive product mix and support a higher operating margin. Retail is all about finding a balance between prices and volumes, and Walmart has clear advantages over the competition, whereas Target does not.
When Walmart reported full fiscal 2024 results in February, it released fiscal 2025 guidance calling for a 3% to 4% increase in consolidated sales, a 4% to 6% increase in consolidated adjusted operating income, and $2.23 to $2.37 in adjusted earnings per share (EPS). Based on its updated guidance, it now expects to achieve the high end, or even above that forecast. If Walmart hits the upper bound $2.37 in EPS, it would represent 16.8% growth compared to fiscal 2024 EPS of $2.03.
Meanwhile, Target’s latest guidance update calls for a 0% to 2% increase in comparable sales and GAAP and adjusted EPS of $8.60 to $9.60. The midpoint of $9.10 is just 1.8% higher than the $8.94 in GAAP EPS Target achieved in 2023.
The results and guidance from both companies suggest that Walmart not only handled the recent downturn better than Target, but that it is also growing much faster. When approaching a long-term investment opportunity, it’s never a good idea to put too much emphasis on a company’s near-term results. But even longer term, I’d say Walmart has some advantages over Target.
The age of two-day shipping and mobile shopping has pressured Walmart and Target to innovate. Both companies have done a good job investing in e-commerce and curbside pickup. A big advantage of Walmart and Target over Amazon is that they have physical stores that support curbside pickup, which is a level of convenience Amazon can’t replicate.
Walmart is arguably better positioned than Target for out-of-store sales (curbside and home delivery) because it competes on price and has the full grocery store business. Walmart+ was launched in 2020, followed by an on-demand home delivery service (Walmart+ InHome) in March 2024. Walmart+ offers free delivery and other perks for $98 a year. Walmart+ InHome adds $40 a year to that subscription but includes free delivery to your kitchen, garage, or doorstep at a time of your choosing on orders totaling $35 or higher.
Amazon has tried to do something similar with Whole Foods and Amazon Fresh, but that’s a more limited option than Walmart’s full grocery business. Target, by comparison, doesn’t work as well as a pure e-commerce play because it doesn’t have enough of an edge to differentiate it from Amazon.
What Target has going for it
Walmart is an overall better business than Target. It is more recession-resistant and has arguably better growth potential with e-commerce. But Target wins in two big ways: valuation and dividend.
Target’s price-to-earnings (P/E) is just 16.3 compared to 28 for Walmart, while its yield is 3% compared to just 1.2% for Walmart. Walmart has been trading at a premium to Target for over three years now. And as mentioned, it is growing faster. But the difference in valuation is surprising and sizable, especially since Target has turned the corner and is recovering (albeit at a slower pace than Walmart).
Walmart and Target are both Dividend Kings, meaning they have paid and raised their dividends for at least 50 consecutive years. They both have low payout ratios — just 49% for Target and 33.1% for Walmart — indicating there is room to raise the dividend faster than earnings growth.
Target’s biggest advantage over Walmart is its dividend. It checks all the boxes with a strong 3% yield and track record, and a reasonable payout ratio. At 1.2%, Walmart’s yield is simply too low for generating reliable passive income. To be fair, Walmart’s low yield isn’t due to a lack of raises, but to the stock price growing at a faster rate than dividend.
Still, Target crushes Walmart when it comes to value and income.
Walmart and Target are both good buys now
While Walmart is a value-focused retailer, Target is more of a value stock. Despite its challenges, Target’s dividend is safe. The company is still incredibly profitable and generates more than double the profit needed to cover the dividend expense. Its over 50-year track record of raising the dividend indicates it has grown the payout through plenty of past cycles and recessions.
Walmart is better positioned to grow over time than Target, but the stock is significantly more expensive and sports a lower yield. If you’re an ultra-long-term investor who isn’t as focused on dividends or present valuation, Walmart could be a better buy. But Target is simply too good a dividend stock to be this cheap.
Given the advantages of both companies and how Walmart’s strengths offset Target’s weaknesses (and vice versa), perhaps the best course of action is a 50/50 split of both stocks.