There is some debate as to whether paying dividends or buying back stock is a more desirable method of returning cash to shareholders. Those in the dividend camp would prefer to have the cash in their pocket, whereas share repurchase advocates argue that retiring shares through buyback activity improves profits as net income is spread over a smaller number of outstanding shares.
Target satisfies adherents of both philosophies in that it has demonstrated a commitment to paying a progressively higher dividend while also maintaining a high level of share repurchase activity. With regards to the latter, CFO Doug Scovanner recently said what CFOs of company’s with buyback programs typically say regarding justification for the buyback activity.
“We believe that our shares currently represent an exceptional value in light of our U.S. and Canadian prospects in both the intermediate term and long term and we intend to continue to pursue the opportunity to selectively retire our shares on behalf of our shareholders,” Scovanner said during Target’s second quarter conference call.
The company spent $688 million during the second quarter to buy back 14.3 million shares at an average price of $48.11 and at the midpoint of the year has spent roughly $1.5 billion to buyback 29.7 million shares.
As for dividends, following a recent increase Target’s annual payout now stands at $1.30 a share. However, if the company’s long term sales and profit growth plan generates the volume of cash the company expect then the dividend is expected to increase by around 18% annually, which means by 2017 the annual dividend will be $3 a share.