This cheap dividend stock is at the top of my list of stocks to buy

Sales exploded during Target (TGT 5.67% ) over the past two years. The company has been an unintended beneficiary of forced closures of non-essential businesses and has maintained its momentum.

Interestingly, the stock has been under some pressure lately and is down 19% from its peak at the end of 2021. As part of its strong operating performance, the sell-off earned Target a spot at the top of the charts. my list of stocks to buy. . What follows is a closer look at what attracts me to Target.

Image source: Getty Images.

Target’s fulfillment services are hugely popular

Target has done a great job of turning its physical stores into a competitive advantage. The company operates nearly 2,000 stores in the United States and represents nearly a large percentage of the population. Over the years, shoppers have moved more of their spending online. This has hurt many retailers who have not adapted well. Target has finally found a great formula: maximize the convenience of your locations.

Buyers no longer need to walk into a target, search their aisles and wait in line to pay. Target’s enhanced fulfillment options allow customers to place an order on their phone and pick it up at their local Target within hours. For consumers who don’t want to get out of their car, Target will deliver an order directly to their vehicle. As fast as Amazon got Prime delivery, it can’t match the speed that Target has developed in most cases.

Target’s same-day services are up 235% in 2020 and 45% more in 2021. Customers appreciate the convenience and efficiency of the options. In response, management is expanding the program, adding Starbucks orders, returns and more in 2022. These types of sales are also lucrative for Target. If a customer picks up an online order from a Target parking lot, that’s an order Target doesn’t have to pay to ship. At the same time, it is a customer who does not need a cashier to make a payment. Of course, Target still has to pay someone to bring the orders to the car.

The benefit of the surge in digital sales realized by same-day services can be seen in Target’s record operating profit margin in the fiscal year ended Jan. 29 of 8.4%. Target’s previous high in the past decade was 7.6% in 2013.

Since dividends are paid out of earnings, rising margins should help support dividend growth. Target’s payout rate was a solid 22% most recently, highlighting plenty of room to increase payout without sacrificing durability.

Inexpensive recovery

Graph of TGT PE ratio

TGT PE ratio and P/FCF ratio data by YCharts.

Target trades at a significantly lower price to earnings and price to free cash flow than its physical rivals, Costco and walmart. The discount to its peers is almost the widest it has been in the last decade. The low price is another reason why I put Target at the top of my list. I wouldn’t buy a stock just because of its low cost. The market value combined with its excellent outlook could make Target the next stock I buy.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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