Target (TGT) is a popular holding across many dividend growth investors’ portfolios.

After all, few companies can match Target’s impressive track record.

With over 100 years of operating history, Target has proven to be one of the most durable companies in the world.

The company also holds the title of being a dividend aristocrat, rewarding shareholders with 49 consecutive years of payout raises. You can view analysis on all of the dividend aristocrats here.

Despite Target’s impressive history, the company has fallen on hard times recently. Once fourth quarter results are finalized, Target’s revenue will have declined year-over-year for five consecutive quarters.

Target Corporation (TGT)

Source: Simply Safe Dividends

Target’s stock has disappointed investors as well, trailing the S&P 500 by more than 20% over the last year.

After dropping by 8% since revising its guidance earlier this week, Target’s shares offer investors a yield above 3.7% and trade for less than 14 times 2016 earnings – a large discount to the broader market.

Let’s take a closer look at the issues impacting Target to determine if the stock might make sense for our Conservative Retirees dividend portfolio, which seeks to preserve capital and deliver a very safe, above average dividend yield.

Target’s Updated Fourth Quarter Guidance

Target announced disappointing traffic and sales trends in its stores for the fourth quarter, joining other brick-and-mortar retailers such as Macy’s (M) and Kohl’s (KSS) that reported similarly unsatisfactory holiday results.

Target expects same-store sales to be down 1.5% to 1% in the quarter and reduced fourth quarter earnings guidance by about 9%.

Despite recent weakness, Target still expects to generate non-GAAP earnings per share of about $5 in 2016, which would be an all-time high for the business.

Like most other value-tilted investors, I get excited when I come across a well-known business that has fallen on hard times.

Some of the best investment opportunities arise when quality dividend growth stocks go on sale for reasons that have nothing to do with the companies’ long-term earnings power.

Sure, an argument could be made that consumer spending is unpredictable and will one day come back for big box stores. However, I’m not so sure that the issues impacting Target are transitory in nature.

Rather than serving as a convenient, low-cost place to shop with almost every piece of merchandise you could ever need available, big box stores have become more of a hassle today, in my opinion.

Shopping online is just so much easier – it saves time, gives me access to every unique piece of merchandise under the sun, costs less in many cases, and makes for a convenient shopping experience from the comfort of my home (or on the go).

Brick-and-mortar retailers better have a darn good value proposition to continue drawing the masses to their stores, and traditional big boxes such as Target and Wal-Mart (WMT) are seeing their core value propositions erode.

Just take a look at the chart below, which shows the market share of total retail sales enjoyed by non-store retailers (white line) and department stores (blue line) since 1992.

Non-store retail sales (i.e. e-commerce players such as Amazon) surpassed department stores in the mid-2000s and haven’t looked back. Meanwhile, department stores have seen their share of total retail sales steadily decline from 9% in 1992 to less than 3% today.

Target Corporation (TGT)

Source: Bloomberg

Department store operators aren’t resting on their laurels (at least not anymore). They realize the potentially existential threat to their business from e-commerce and shifting consumer shopping preferences.

They are scrambling to catch up with Amazon and others, but e-commerce sales account for a relatively small portion of most of their businesses.

Target Corporation (TGT)

Source: Forbes

Omni-channel darlings Nordstrom and Macy’s have lost their luster with investors since the middle of 2015 as well. Take a look at their stock prices, which have been chopped in half.

Nordstrom

Target Corporation (TGT)

Source: Google Finance

Macy’s

Target Corporation (TGT)

Source: Google Finance

E-commerce operations require substantial investments in distribution centers, technology, and more. The long-term profitability of these initiatives is largely up in the air, and the jury is still out if most of these brick-and-mortar firms can really nail the online shopping experience to be a preferred choice for digital shoppers.

Target’s mix of business is different than department stores (e.g. about 20% of Target’s revenue is from groceries), but it faces many of the same pressures.

The company’s digital sales grew 40% last quarter, but they aren’t (yet) helping Target’s bottom line. Here’s what Target’s CEO said:

“While we significantly outpaced the industry’s digital performance, the costs associated with the accelerated mix shift between our stores and digital channels and a highly promotional competitive environment had a negative impact on our fourth quarter margins and earnings per share.”

As seen below, there is really no need for additional big box stores in the U.S. Target’s new store growth has dried up, placing ever-increasing importance on its ability to profitably drive same-store sales higher. E-commerce initiatives need to be successful, but it’s going to take time and there are no guarantees.

Target Corporation (TGT)

Source: Target Annual Reports, Simply Safe Dividends

Profitable growth in the mass merchandise industry is proving to be hard to come by thanks to a combination of market saturation (there is no need for more 130,000+ square-foot stores), rising labor costs, and intense competition from low-cost e-commerce businesses.

If pressure on brick-and-mortar retailers intensifies and growth in Target’s digital operations is unable to offset the weakness, what will happen to Target’s dividend?

Impact on Target’s Dividend Safety & Growth

Declining fundamentals are typically bad news for a company’s dividend safety and growth profile. However, each case needs to be examined individually to draw any conclusions.

Despite the ongoing malaise in brick-and-mortar retail, Target’s dividend remains extremely safe with decent growth prospects for now.

Target’s Dividend Safety Score is 98, indicating that its dividend payment remains one of the safest in the market. Investors can learn more about how Dividend Safety Scores are calculated and view their real-time track record by clicking here.

Target Corporation (TGT)

Assuming Target delivers $5.00 in earnings per share this fiscal year as management expects, the company’s payout ratio for the year will be 48%.

While it’s true that Target’s payout ratio has meaningfully increased over the last decade (see below), its current level is very healthy.

Target Corporation (TGT)

Source: Simply Safe Dividends

Target’s business is also recession-resistant because consumers still need to purchase essentials such as groceries when times get tough. The company’s sales actually grew during the financial crisis, and Target’s earnings per share only dipped by 14% in 2009.

It seems very unlikely that Target’s business would experience a steep and sudden downturn that would push its payout ratio to dangerous levels (earnings would need to be cut in half to get Target to a 100% payout ratio).