Dividends Talk: What Procter & Gamble, TJX, and Wal-Mart Are Saying

Dividends can be enormously important, not only as a source of income for investors, but also because they confer valuable information about the health of a business and management´s expectations on the future. Let's look at recent dividend announcements from Procter & Gamble (NYSE: PG  ) , TJX (NYSE: TJX  ) , and Wal-Mart (NYSE: WMT  ) and try to listen to what these dividends are telling investors.

Procter & Gamble is rock-solid
Procter & Gamble announced on Monday a 7% increase in dividends, growing the quarterly payment from $0.6015 to $0.6436 per share. This means a generous dividend yield of 3.2% for Procter & Gamble at current prices, which is not bad at all for such a solid and reliable company.

Source: Procter & Gamble.

The payout ratio is now above 60% of average earnings estimates for the fiscal year ending in June, so future dividend increases will probably need to be in line with earnings and cash flow growth, since the payout ratio doesn't offer a lot of room for expansion.

It's not easy for a giant in a mature industry to accelerate growth in highly penetrated markets like the U.S. and other developed countries. In emerging markets, where the company still has considerable opportunities for growth, currency fluctuations have been a drag on performance lately, so Procter & Gamble has been generating uninspiring growth rates in recent quarters.

On the other hand, the company is a global juggernaut with huge scale and enormously valuable brands: Procter & Gamble owns 25 brands generating over $1 billion in revenues around the world, and it serves nearly 4.8 billion customers in more than 180 countries.

This has provided the strength for the company to sustain capital distributions through good and bad times, Procter & Gamble has paid uninterrupted dividends for 124 consecutive years, and the company has increased distributions over the past 58 years in a row.

TJX is firing on all cylinders
Featuring brands such as T.J. Maxx, Marshalls, and HomeGoods, among others, TJX is a market leader in off-price apparel and home fashions, with operations in the U.S., Canada and Europe. TJX sells its products at big discounts of between 20% and 60% to typical retail prices, and this has been a winning business model in the highly promotional retail environment over the past several years.

Source: TJX.

On Feb. 26, TJX announced a big 21% dividend increase, marking the 18th consecutive boost, and dividends have grown at an impressive rate of 23% per year over that period.

CEO Carol Meyrowitz was quite clear about the optimistic message embedded in TJX's dividend increase:

With our tremendous cash flow and excellent financial returns, we remain committed to returning cash to our shareholders while continuing to invest in the near and long-term growth of TJX. All of this underscores our confidence in our ability to continue to deliver significant increases in sales, earnings, and cash flow, and generate superior financial returns.

The dividend yield isn't very impressive at 1.2%, but payments represent less than 22% of earnings estimates for the year ending January 2015, so TJX will most likely continue delivering substantial dividend growth for investors for years to come.

Heavy headwinds for Wal-Mart
Wal-Mart has faced considerable difficulties lately. A harsh retail environment and growing competition from both online and bricks-and-mortar discount retailers have hurt performance over the past few quarters, and this is translating into lackluster dividend growth.

Source: Wal-Mart.

On Feb. 21, Wal-Mart announced an uninspiring dividend increase of only 2%. That was a material reduction in growth versus the 18% increase in dividends the company implemented in the same period of 2013.

Wal-Mart announced dividends the same day it reported earnings for the quarter and year ended on Jan. 31, and weak financial performance explains why management is being so cautious in terms of dividend growth.

Total sales increased 1.5% during the quarter, but Wal-Mart delivered declining same-store sales in the U.S., both for the quarter and the full year. Comparable-store sales in Wal-Mart U.S. declined 0.4% in the 14 weeks ended on Jan.31, and 0.6% during the year.

The dividend yield is considerable at 2.5%, and the payout ratio is clearly safe, in the area of 36% of earnings estimates for fiscal 2015. The company has increased distributions for 41 consecutive years, so Wal-Mart has proved its financial stability over the long term.

However, dividend growth will likely remain at subdued levels until management finds a way to reinvigorate performance.

Bottom line
Money talks, and dividend distributions say a lot about a company's performance and management's level of confidence on the future. Procter & Gamble is a solid and stable dividend powerhouse, TJX is growing at full speed, and Wal-Mart is facing material difficulties, even if dividends are clearly sustainable from a financial point of view.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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9/1/2015 10:16 AM
PG $69.29 Down -1.38 -1.95%
Procter & Gamble CAPS Rating: ****
TJX $69.67 Down -0.65 -0.92%
The TJX Companies,… CAPS Rating: ****
WMT $63.89 Down -0.84 -1.30%
Wal-Mart Stores CAPS Rating: ***