Since I passed all my securities tests and became a licensed broker in 1991, I have used the most direct technique to measure the economy. That simple technique is to walk around stores, and shopping centers to see what is going on. I look at what I call the people count and the bag count.
For instance in 1992 and again in 1994 when we went through difficult economic times, you could feel the negativity in every store and mall. Today, I still use that technique and find the people count and the bag count quite vigorous but not in every store.
Times have changed over the past 25 years and e-commerce has captured a significant volume of economic activity as far as retail goes. Yet, I still find my observations to be of value.
My recent observations suggest that Target, symbol TGT, is weak whereas Walmart, symbol WMT, and Costco, symbol COST, were mobbed.
Which stock is the best for me, a dedicated income investor?
As you can see by the tables below. The yield winner is Target (TGT) at 3.49%. Costco (COST) has the weakest yield at 1.2% and Walmart (WMT) has an acceptable yield of 2.86%. If I find a stock I really like and the yield is below my target which right now is about 2.75%, I look for covered calls to make up the difference.
The tables below present the best calls I could find. While COST is close to delivering a 10% return if it were called away (the call buyer actually buys the stock at the strike price,) it is not compelling. If COST tanks and we are stuck with it, a yield of just 1.2% barely makes it worth waiting.
Every income investor knows that future dividend growth is a must. We can only go by history to help decide which stock will deliver yield growth in the future. Again, look at the tables above and you can see that all three stocks have delivered dividend growth. This time TGT is the winner with a dividend growth rate of 20% over the past five years with COST a close second at 17.5%. WMT has the lowest but very acceptable dividend growth over the past five years of 7.4%
Revenue Growth and EPS
Anyone who reads my blog, knows that I value revenue growth. The revenue growth metric is the hardest of the group to fulfill in our current economic environment. Costco is the only stock of these three that meets my 4% revenue growth hurdle. Walmart has nominal growth at .82% and Target has negative revenue growth.
I use D/E (debt to equity ratio) to make a quick measure of the safety of a stock's balance sheet. Many measures can be used and if you know how to read financial statements use whatever metric you think is best. Regarding D/E it is interesting to note that Target has a D/E ratio greater than 1. One is the max I could handle unless the industry carries very high D/E ratios. In this comparison of three stocks WMT at .5341 and COST at .4273 are in the comfortable range.
The final tables present the scorecard, using my 2016 Dividend selection criteria for each of these stocks.
I have decided to add WMT to my 2016 portfolio. Costco just does not deliver enough income to make it worth holding without covered calls to make up the difference and Target is too weak from a revenue and D/E view.
Consider WMT for the income producing portion of your portfolio.
Disclosure: Long WMT