Buy This Safe Stock -- and Double Your Money in Five Years

Back in the fall of 2010, I touted technology giant International Business Machines (NYSE: IBM) in the belief that its stock was poised to have a strong run. A key part of this bullishness was a bold prediction by its management team that it would double earnings per share (EPS) from $10 to $20 by 2015.

So far, so good. 

IBM grew EPS to more than $13 in 2011 and could hit $15 by the end of this year. The stock is following suit and is up nearly 70%. This is a great return overall, and well ahead of the market's 36% gain.

 

Another important ingredient to a company making a bold prediction on its future prospects is its credibility. 

In IBM's case, it has been around for more than 100 years. And though it has had low points during its history, the company's management team  has nearly flawlessly executed for more than a decade now.

I have found another stock that could be on the cusp of a sustainable rally. In fact, it recently provided investors with a similarly bold prediction on its earnings and dividend levels within the next five years.

I'm talking about big-box retailer Target (NYSE: TGT).

Target recently announced plans to nearly double the $4.28 EPS it reported in 2011 to $8 or more by 2017. This announcement came right after the company completed a program to repurchase $10 billion of its own shares. This move was not at all inconsequential, given it represented 25% of its total market cap of $40 billion and benefits existing shareholders by reducing the number of shares outstanding.

I think management has credibility to make this plan come to fruition for a couple of key reasons. First, Target's business is straightforward and easy to understand. Investors and consumers alike are probably well aware of its large retail stores and bulls-eye logo. None of the products it sells are overly unique, but rather focus on everyday necessities, including groceries, toiletries and basic clothing and related apparel.

This business model may sound mundane, but Target has carved out a special niche among shoppers. Retailing giant Wal-Mart (NYSE: WMT) may be slightly more competitive on price, but certain shoppers don't like frequenting its crowded and sometimes dingy, utilitarian stores just to save a buck. Instead, these consumers flock to Target, where they can buy more fashionable clothing, house wares and even furniture. 

Because it sells more basic goods, Target is also somewhat recession-resistant. During the credit crisis, Wal-Mart performed better because shoppers wanted to stretch their dollars farther, but Target remained the go-to store for many consumers. On the flip side, Target is a better performer when consumers are more optimistic about the economy -- and this slowly but surely seems to be happening now. 

Its past track record is sound. During the past three years, despite the recession, average annual sales are up by only a few percent. Yet management has performed admirably and controlled costs to boost earnings by more than 14% annually.

Downside protection and upside growth potential
Since the crisis, Target has been returning to its roots and remodeling existing stores in order to offer a wide variety of groceries. This move has pure growth potential. Wal-Mart has grown into the largest grocery retailer in recent years. Though Target is a bit behind, the catching up should boost growth. Also, Target recently announced ambitious growth plans in Canada. The company inked a deal to control 220 store sites in Canada and plans to open 100 to 150 stores by the end of 2014. In total, it can boost store count by more than 12% from its current count of 1,765 locations.

Target also plans to boost its annual dividend from a current $1.20 per share to $3 (or more) in the next five years. Its current dividend yield is nearly 2.0%, and for investors who buy the stock now, the future dividend would represent a 5% yield. For investors, this is better than owning any sort of bond, as dividends can grow along with the company. And for Target, this is yet another bullish sign.           

Risks to Consider: A down economy would be more of a negative to Target than to archrival Wal-Mart, but I don't see another recession happening for the time being. Of course, the economy can stall out unexpectedly, but because Target focuses on food and other necessities that can maintain foot traffic regardless of the economic cycle, I don't see this as an imminent risk either.

> Simply applying Target's current price-to-earnings (P/E) multiple of 14 to its projected earnings of $8 by 2017 (14 x $8) gets me to a stock price of $112, or 90% ahead of current levels. Dividends during this period would get total returns above 100%, meaning investors have the opportunity to potentially double their money with this stock over a five-year period. Annually, this would boil down to a solid total return of about 20%.