TJX Companies (TJX) is the largest off-price retailer of brand-name and designer apparel and home fashions in the U.S. Its items typically sell for 20%-60% less than regular marked prices. Its store brands are: T.J. Maxx, Marshalls, HomeGoods, HomeSense, and Sierra Trading Post.
The company not only offers diversity in its store brands, but also in its number of stores and global locations. There are about 3,000 stores in the U.S., and over 1,000 stores in Australia, Canada, and Europe.
The info contained in this article will speak for itself about how well-run this company is, and has been for the past 5 and 10 years. Additionally, the store offers great value to its customers, which continued to contribute to the company’s steady earnings growth.
However, the company is not without concerns. Some of these more recent concerns are increasing competition from Ross Stores (ROST) to further penetrate the off-price retail market, an increase in the entry-level pay of employees has impacted earnings, and the unfavorable impact of foreign currency on earnings from outside the United States. So regardless of how well the company is being run, and despite the company’s increased revenues, these factors could continue to have a negative effect on earnings.
The above factors are real concerns and should be carefully considered. Though this article will focus more on the fundamentals and facts of the business. We’ll weigh out the pros and cons to see if the company is a suitable investment for dividend investors, and if it’s at a good price when compared with the stock’s real value.
Snapshot Of The Company
A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. It shows a score of around 86/100. Therefore, TJX Companies, Inc. is considered to be a good company to invest in, since 70 is the lowest good company score. TJX has high scores for 10-Year Price Per Share, ROE, Earnings per share, Ability to Recover from a Market Crash or Downturn, ROIC, and Gross Margin Percent. It has a low score for PEG Ratio. A low PEG Ratio score indicates that the company may not be experiencing high growth consistently over the past 5 years.
In summary, these findings show us that TJX seems to have above average fundamentals since the majority of categories produce good scores.
Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.
(Source: BTMA Stock Analyzer )
Let’s examine the price per share history first. In the chart below, we can see that price per share has been mostly consistent at increasing over the last 10 years, with the exception of the past year where share price had almost declined by half. This is not a concern of performance though, because it was caused by a 2-to-1 split. Overall, share price average has grown by about 11.68% over the past 10 years or a Compound Annual Growth Rate of 1.24%. However, when we consider the years 2010-2018 without including the split, the Compound Annual Growth Rate was 9% and the total growth during this period was 99.26%.
(Source: BTMA Stock Analyzer – Price Per Share History)
Looking closer at earnings history, we see that earnings have grown consistently over the past 10 years. The earnings grew gradually from 2009 to 2018 with large increases in 2013 and this past year.
Consistent earnings make it easier to accurately estimate the future growth and value of the company. So in this regard, TJX is a good candidate of a stock to accurately estimate future growth or current value.
(Source: BTMA Stock Analyzer – EPS History)
Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.
Return On Equity
The return on equity has been consistent at around 53% for the last 5 years. ROE went down in 2015 and 2017 to about 52% and has risen back to approximately 54% for this past year. 5-year average ROE is very good at around 53.12%. For return on equity (ROE), I look for a 5-year average of 16% or more. So TJX easily meets my requirements.
(Source: BTMA Stock Analyzer – ROE History)
Let’s compare the ROE of this company to its industry. The average ROE of 50 Apparel Stores companies is 11.32%.
Therefore, TJX Companies, Inc.’s 5-year average of 53.12% and current ROE of 54% are well above average.
Return On Invested Capital
The return on invested capital has been steadily declining for the past 5 years with the exception of this past year where ROIC grew slightly. 5-year average ROIC is very good at around 38.65%. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So TJX easily passes this test as well. It is worrisome that ROIC has been declining, so that is something that an investor would want to keep an eye on.
(Source: BTMA Stock Analyzer – Return on Invested Capital History)
Gross Margin Percent
The gross margin percent (GMP) has been stable and increasing over the last 5 years besides 2018 where GMP declined. 5-year average GMP is low at around 28.74%. I typically look for companies with gross margin percent consistently above 30%. So TJX does not meet my GMP requirements.
(Source: BTMA Stock Analyzer – Price Per Share History)
Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a good indicator, telling us that the company owns more than it owes.
TJX’s Current Ratio of 1.55 is good, indicating that it has a good ability to use its assets to pay its short-term debt. Ideally, we’d want to see a Current Ratio of more than 1, so TJX exceeds this amount.
According to the balance sheet, the company seems to be in good financial health. In the long term, the company seems good in regards to its debt-to-equity. In the short term, the company’s financial situation is considered to be in good health, as supported by its current ratio.
The Price-Earnings Ratio of 21.1 indicates that TJX might be selling at a low price when comparing TJX’s PE Ratio to a long-term market average PE Ratio of 15. The 10-year and 5-year average PE Ratio of TJX has typically been between 16.9 and 18.8, so this indicates that TJX could be currently trading at a low price when comparing to TJX’s average historical PE Ratio range.
TJX currently pays a dividend of 0.78% (or 1.52% over the last 12 months).
(Source: BTMA Stock Analyzer – Misc. Fundamentals)
The Story Behind The Dividend
In regards to dividend history, I’m first interested in knowing if the payout ratio is sustainable. At this time, it’s around 30%, which means that there is still plenty of room to grow the dividend. Also notice that TJX has a regular history of buying back shares, which contributes to higher payout ratios.
If we look only at the dividend yield, we see a range of 1.14% to 1.66%. This stock pays out a moderate dividend. Dividend yields have increased somewhat consistently over the 5-year period, therefore this stock may be desirable for some dividend investors.
Although TJX participates in share buybacks, sometimes buybacks don’t make sense, as according to Warren Buffett: “There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.”
In the example of TJX, the company appears to have ample equity as indicated by its satisfactory debt-to-equity ratio. Now let’s consider its borrowing capacity. "TJX-US has the financial and operating capacity to borrow quickly."
Now to see if the buyback timing made sense. From the view of a share price chart over the past 5 years, the worst times to do share buybacks would have been when TJX was climbing highest in stock price. This would have been around 2015 and 2018. If we look at the dividend chart above, we can see that every year of the past five, TJX has bought back about the same percentage of stocks (between 3% and 3.5%) Therefore, it seems like TJX has bought back stocks on a regular yearly basis, and are not purposely planning share buybacks with a strategic plan.
If I were currently interested in buying TJX now for the dividend, I would be trying to buy when the dividend yield was highest relative to its past. From the chart below, we can see that the dividend yield is near a somewhat mid-high point relative to the past 10 years. Therefore, it’s a fairly good time to buy now if my priority is a better than average return through dividends.
Overall, the dividend situation with TJX is better than average. On the positive side, the stock pays a somewhat consistently increasing dividend yield. The dividend yield is near a mid-high level when compared with the past 10 years. Finally, the payout ratio leaves plenty of room to grow the dividend.
On the negative side, share buybacks haven’t been completed at an opportune time to return the most value to shareholders. The payout ratio is approaching high levels and should be watched.
This analysis wouldn’t be complete without considering the value of the company vs. share price.
Value Vs. Price
For valuation purposes, I will be using an adjusted diluted EPS of 2.02. I’ve used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
(Source: Wealth Builders Club)
According to this valuation analysis, TJX is overpriced:
- If TJX continues with a growth average similar to its past 10 years earnings growth, then the stock is overpriced at this time.
- If TJX continues with a growth average similar to its past 5 years earnings growth, then the stock is overpriced at this time.
- If TJX continues with a growth average similar to its past 10 years book value growth, then the stock is overpriced at this time.
- If TJX continues with a growth average similar to its past 5 years book value growth, then the stock is overpriced at this time.
- If TJX continues with a growth average similar to its past 5 years total equity growth, then the stock is overpriced at this time.
- According to TJX’s typical PE ratio relation to the S&P 500's PE Ratio, TJX is overpriced.
- If TJX continues with a growth average as forecasted by analysts, then the stock is overpriced.
This analysis shows an average valuation of around $41 per share versus its current price of about $51; this would indicate that TJX Companies is overpriced.
According to the facts, TJX is financially healthy in a long-term sense in having enough equity as compared with debt, and in the short term because the current ratio indicates that it has enough cash to cover current liabilities.
Other fundamentals are solid, including EPS, ROE, and ROIC. However, the ROIC should be watched because it has been on a declining trend.
The dividend situation is better than average as the company pays a moderate dividend with a yield that has been fairly steady at increasing over the past 5 years.
Lastly, this analysis shows that the stock is overpriced.
Another pro is that this stock has shown its ability to perform better than the S&P 500 benchmark after a major recession. Indicating that customers continue to buy products from this store even when budgets may be tight. Below, we can see how TJX performed against the S&P 500 during the economic crisis of 2008 and years onward. You can see TJX had a similar decline as the S&P 500 during 2008/2009, then it experienced more growth in the years that followed the recession.
“Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 10.9%. This year, analysts are forecasting earnings increase of 23.55% over last year. Analysts expect earnings growth next year of 9.71% over this year's forecasted earnings.” (Source: Forecast Earnings Growth)
If you invest today, with analysts’ forecasts, you might expect about 10.9% growth per year. Plus we’ll add the current 1.51% forward dividend. This brings the annual return to around 12.41%.
Here is an alternative scenario based on TJX’s past earnings growth. During the past 10 and 5-year periods, the average EPS growth rate was about 14.98% and 6.56%, respectively. Plus the average 5-year dividend yield was about 1.26%. So we’re at a total return of 16.24 % to 7.82%.
But when considering cash flow growth over the past 10 and 5 years, the growth has been 10.11% and 3.16%, respectively. Plus the average 5-year dividend yield would give us a total return of 11.37% to 4.42%. Therefore, considering the average of these ranges, our annual return could likely be around 7%-12%.
If considering actual past results of TJX Companies, which includes affected share prices, and long-term dividend yields, the story is a bit different. Here are the actual 10 and 5-year return results.
10-Year Return Results if Invested in TJX:
Initial Investment Date: 3/10/2009
End Date: 3/10/2019
Cost per Share: $5.80
End Date Price: $50.72
Total Dividends Received: $3.68
Total Return: 837.86%
Compound Annualized Growth Rate: 25.09%
5-Year Return Results if Invested in TJX:
Initial Investment Date: 3/10/2014
End Date: 3/10/2019
Cost per Share: $31.12
End Date Price: $50.72
Total Dividends Received: $2.70
Total Return: 71.65%
Compound Annualized Growth Rate: 11.42%
From these scenarios, we have produced results from 11% to 25%. I feel that if you’re a long-term patient investor and believer in TJX Companies, you could expect TJX to provide you with around at least 7-12% annual return and if you buy at a discounted price and wait to sell at an opportune time, you could reap 16%-20%+. For the short-term swing trader or impatient investor, each quarter of earnings reports can provide the opportunity for significant swings in price due to the cyclical nature of the booms and busts of the retail business.
So this stock could either pay off a hefty return if you buy and sell at the right time or if poor earnings cause the price to plummet, you can be assured that you’re holding onto a quality company with excellent fundamentals. Therefore, if you’re confident that you bought at a price that was less than the actual value of the stock, then you can wait with likely assurance that this stock will climb back up in price towards its real value.
As a comparison, the S&P 500’s average return from 1928–2014 is about 10%. So in a typical scenario with TJX, you could expect to earn a similar return result as compared with an S&P 500 index fund. But the long-term or diligent investor that buys at a discount and sells at an opportune time, could significantly outperform the S&P 500 benchmark.
For me, the choice is certain. I would take an objective look at this company and realize that TJX Companies is a chance to own a solid company with good long-term fundamentals with a steady stream of customers that repeatedly enjoy its stores offering popular styles and brands at reasonable prices. There’s no doubt that this is a well-run company with long-term solid fundamentals. The main mission to make an exceptional return with TJX is to be sure you buy when it’s selling for less than value and then let the company’s growth system compound your wealth.
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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.