TJX: 20% Annual Dividend Increases Make It A Worthy Stock For Dividend Growth Investors

Summary

• TJX reported 4% same-store sales in the most recent quarter.
• TJX has grown its dividend an average of 23% for the past 22 years.
• The dividend payout ratio is still very low, leaving plenty of room for high dividend growth moving forward.
• While TJX’s stock is barely off of its 52-week high, the company’s current P/E is barely above its normal P/E.

By Nate Parsh

With more than $35 billion in sales, TJX Companies (NYSE:TJX) is the largest off-price apparel and home fashion retailer in the country. TJX is also a member of the Dividend Achievers, a group of stocks with 10+ consecutive annual dividend increases. You can view all 261 Dividend Achievers here.

TJX operates T.J. Maxx and Marshalls stores, HomeGoods, TJX Canada and TJX International. TJX partners with more than 20,000 vendors around the world who are attempting to clear inventory to make way for new merchandise. It is able to buy these products at steep discount, usually 20-60% below regular prices. The company is then able to turn around and offer these name brands at lower prices to their customers. With a global network of stores, it is able to identify what brands a local community prefers and ship products to those locations every week.

TJX stock is up a little more than 9% year to date, while the S&P 500 is up 2%. This article will explore TJX’s recent earnings report, impressive dividend growth history, and valuation.

Earnings Overview

TJX released fourth quarter and fiscal year 2018 earnings on February 28^th. Excluding a benefit due to tax reform, quarterly earnings per share were $1.19. This missed analysts’ estimates by $0.08, but still improved upon the previous year’s quarter EPS by 16%. Revenues grew 15.7% year over year to a company record of $10.96 billion. Revenue for the quarter topped expectations by $200 million. Same-store sales had been expected to show 2.2% growth, but TJX posted 4% growth in the quarter. Each of the company’s four divisions saw same-store-sales growth of at least 3%.

Excluding a positive benefit due to tax reform and an extra week during the fiscal year, EPS for the year improved 9% to $3.85. Sales increased 8% to $35 billion. Same-store-sales comps were up 2% from the previous year. Whereas some retailers struggled mightily during the most recent holiday season, these comps show that TJX performed very well.

For fiscal 2019, TJX sees earnings per share of $4.00-4.08. This is after a significant tax reform benefit of $0.73-0.75 per share is removed. This would be a 4-6% increase from fiscal 2018. The company is expecting sales to be in the range of $37.6 billion-37.8 billion and same-store sales to grow 1-2%.

TJX also authorized a new buyback program that will repurchase between $2.5 billion and $3 billion worth of shares during this fiscal year. This is on top of the $1.1 billion the company has remaining on its previous repurchase program. At current prices, this total buyback is more than 7% of TJX’s market cap.

While some retailers like Kmart, Toys “R” US and others are closing thousands of stores, TJX is planning to add new ones in 2018. The company opened its 4000^th store during the previous quarter and plans to add a net of 238 new stores during this year. This would bring their total to more than 4300 stores around the world.

Earnings for TJX were solid. A 4% same-store-sales comp is very strong and management gave guidance that tops the previous year’s EPS and sales totals. There is a lot to like about TJX, but what I really find attractive is the company’s dividend history.

Dividend History

TJX has raised its dividend to shareholders for the past 22 years. What I find remarkable about TJX is how consistent the company’s increases are year in and year out. Over the past 3, 5 and 10-year time frames, TJX has raised its dividend an average of 21.4%, 22.2% and 21.6%, respectively. TJX has increased its dividend an average of 23% over the past 22 years. I am not aware of too many companies that are able to grow their dividend at this type of growth rate for multiple decades. With this type of steady dividend growth, you get a chart that looks like the following.

Source: YCharts

This chart shows the dividend increasing in pretty much a straight line. While some income investors might be turned off by TJX’s sub 2% yield, I like the 20%+ raise the company offers each year. The stock currently is about 0.5% off of its 52-week high. Some might shy away from a stock that has outperformed the market benchmark and is very close to its high, but I find TJX’s dividend growth to be appealing even at this price.

The company stated on the conference call that it intends to raise the dividend payment for June by 24.80%. Based off of the recent close of $84.39, the new annualized dividend of $1.56 equals a 1.85% yield.

What allows TJX to offer the dividend growth that it does? The answer is found in the company’s cash flows.

Source: YCharts

While the cash flows are slightly uneven over recent history, we can see that the general trend is toward a higher amount of cash. On the conference call, management stated that due to “recent changes in U.S. federal tax law, we expect a significant increase in cash flow.” TJX already offers impressive dividend growth, imagine what it can return to shareholders with an increase in cash flow from a lower corporate tax rate.

Even given the company’s dividend growth history as well as the higher levels of cash flow due to tax reform, let’s assume that the company can grow its dividend at just 20% per year for the next few years. This would be below all of its average increase over every period of time. Here is what the yield on cost would look like a decade from now.

Year	Dividend	YOC
2018	$1.56	1.85%
2019	$1.95	2.31%
2020	$2.44	2.89%
2021	$3.05	3.61%
2022	$3.81	4.51%
2023	$4.76	5.64%
2024	$5.95	7.05%
2025	$7.44	8.81%
2026	$9.30	11.02%
2027	$11.62	13.77%
2028	$14.53	17.22%

Click to enlarge

At a growth rate below what the company has historically offered investors, the increases really start to add. Just as impressive to me is how much more room TJX has to grow its dividend even after more than two decades of significant growth.

Source: YCharts

With an average raise of 23% over the last two decades, you might think that TJX’s payout ratio would be very high, maybe even dangerously high. You would be wrong. TJX’s payout ratio is below 32% and this is the highest the ratio has been in recent years. Increasing cash flows have allowed the company to keep increasing its payments to shareholders while maintaining a very low payout ratio. A company growing earnings and offering generous raises while keeping its payout ratio low is one I am very much interested in owning.

Valuation Analysis

According to F.A.S.T. Graphs, TJX has a current P/E. of 21. This is less than 1.5% above the stock’s average price to earnings multiple for the past five years. Even close to its 52-week high, it appears that TJX is just barely overvalued relative to its normal P/E. TJX is demonstrating strong same-store-sales growth and has a very impressive dividend history.

Even after 22 years of high growth, the company’s payout ratio is very low. TJX might not appeal to investors solely interested in high dividend yields, but it has a reasonable valuation and is an attractive investment for dividend growth.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.