Friday, May 22, 2015

TJX Companies (TJX) Dividend Stock Analysis

The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer in the United States and internationally. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX Europe. TJX Companies is a dividend achiever, which has raised dividends for 18
years in a row.

The most recent dividend increase was in March 2015, when the Board of Directors approved a 20% increase in the quarterly dividend to 21 cents/share.

The company’s largest competitors include Ross Stores (ROST), Kohl’s (KSS) and Target (TGT).

Over the past decade this dividend growth stock has delivered an annualized total return of 20.40% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.

The company has managed to deliver a 17.10% average increase in annual EPS over the past decade. TJX Companies is expected to earn $3.30 per share in 2016 and $3.71 per share in 2017. In comparison, the company earned $3.15/share in 2015.

Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 983 million in 2006 to 704 million by 2015. I like the fact that management is focused on delivering excess cashflow and then sharing that cashflow with shareholders in the form of higher dividends and share buybacks. While I would prefer special dividends to buybacks, I will take what I can.

Future growth in earnings per share will be driven by opening new stores, increasing same store sales, increasing margins, lowering costs and repurchasing shares.

I like the fact that TJX has a better scale in number of stores, purchasing agents and contacts, relative to its close rivals. This could translate into better bargaining power with suppliers, lower prices and high margins. The company has 900 buyers and 17000 vendors it works with.

The company sells branded quality fashion at discounted prices. It has a wide demographic reach and global sourcing capabilities. The type of company like TJX can prosper even during a difficult economic conditions, since it offers discounted branded fashion products to consumers.

Same store sales will be increased by attracting more traffic, expanding e-commerce, and continuing to provide a great assortment of great values on fashion, brands and quality. Loyalty programs and increase in marketing can result in retention of customers and attracting new ones to the stores. Maintaining a low inventory turnover rate of less than 2 months can also help in reducing markdowns and ensuring that a fresh new inventory assortment is available for repeat customers.

The company has 3389 stores as of fiscal year 2015. This includes 2094 TJ Maxx or Marshal’s stores, 487 Homegoods, 368 TJX Canada and 440 TJX Europe. TJX Companies expects that the number of stores under its umbrella could eventually reach 5475. The projections include 3000 TJ Maxx or Marshal’s stores, 1000 Homegoods, 500 TJX Canada and 975 TJX Europe. The company is opening its first stores in Austria and The Netherlans in 2015. While store saturation in the US is a potential risk, international expansion could bring a source of growth for years ahead. As international operations expand their scale, this could aid operating margins and profits. The downside to international operations is that a larger portion of TJX profits will be impacted to short-term fluctuations in the US dollar.

TJX Companies is also focusing on expanding its e-commerce platforms such as and in the US and in the UK. Further sales growth could be obtained by leveraging the brick and mortar and online platforms. An example includes allowing customers to shop online and pick up items in stores.

I really like the fact that TJX Companies is dedicated to sharing excess cashflows with shareholders in the form of share buybacks and dividends. I would actually prefer more dividends to buybacks, but would take what I can get.

The annual dividend payment has increased by 25.30% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will likely exceed growth in earnings per share given that the payout ratio has room for expansion.

A 25% growth in distributions translates into the dividend payment doubling almost every three years on average. If we check the dividend history, going as far back as 1997, we could see that TJX Companies has managed to double dividends almost every three and a half years on average.

In the past decade, the dividend payout ratio has increased from 12.70% in 2006 to 21.30% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

TJX Companies has also managed to grow return on equity from 37.90% in 2006 to 52.20% in 2015. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, TJX Companies is overvalued at 20.60 times forward earnings and yields 1.20%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. I may consider initiating a small position in the stock on dips below $66/share.

Full Disclosure: None

Relevant Articles:

Ross Stores (ROST) Dividend Stock Analysis
The Value of Dividend Growth
The work required to have an opinion
The Value of Dividend Growth
The Pareto Principle in dividend investing

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