Discount retail giant Target (TGT -0.54%) and consumer goods manufacturer Procter & Gamble (PG -0.03%) are in an exclusive club when it comes to dividends: They have outperformed most of their peers by stringing together a long track record of steadily rising payouts, even through prior market downturns.
That history suggests that income investors will benefit from higher cash returns from either stock in 2023 and beyond. But which one is the better dividend stock to buy and hold? Let's dive right in.
Comparing growth trends
Both companies have been performing well through a difficult selling environment. In late February, Target announced that comparable-store sales rose 1% in the most recent quarter, after jumping 9% a year earlier. Customer traffic at its locations improved by 2% for the full 2022 year after soaring by 12.3% in 2021.
Likewise, Procter & Gamble grew organic sales by a healthy 5% year over year in the most recent quarter, thanks to solid demand for consumer staples like laundry care products. Target's tilt toward discretionary products such as apparel has exposed it to weaker sales trends than P&G and more direct peers, including Walmart and Costco Wholesale. That's why on the growth matchup, P&G looks stronger today.
Pricing power
Investors who prioritize earnings growth will favor P&G stock, too. The company has raised prices over the last several quarters so that it can pass along rising costs. Its pricing power is clear from the fact that, while sales volumes have declined, P&G's profitability is holding steady and remaining well above peers like Kimberly-Clark. Target, on the other hand, has seen its operating margin plummet as it cut prices in slow-moving niches like home furnishings.
PG Operating Margin (TTM) data by YCharts
Target is aiming to begin moving its profit margin back toward the 6% of sales that it was achieving before the pandemic, but P&G's profitability outlook is clearly brighter.
Cash returns and valuation
The good news for Target shareholders is that the company's inventory position suggests that its finances could start improving materially by the second half of 2023. Operating cash flow is solidly positive, too, even though this metric worsened over the last several quarters. The two stocks deliver roughly the same dividend yield today of 2.6%.
As you might expect, investors are paying a much larger premium for P&G stock today. Shares are valued at 4.4 times annual sales, or more than double the valuation for peer Kimberly-Clark. Target, on the other hand, is priced at 0.7 times sales, or just slightly higher than Walmart's P/S ratio of 0.6.
Target enjoyed a valuation of more than double that rate in earlier phases of the pandemic. But that result was mostly a reflection of its accelerating sales trends and expanding profit margin. It seems unlikely that the retailer will repeat that success, especially given the potential for a recession ahead.
Value-focused income investors might prefer Target stock anyway, since its price reflects more pessimism about its short-term earnings outlook. But Procter & Gamble's stronger market position, pricing power, and profit margins make it the more attractive dividend stock today.
