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3 Reasons to Buy This Dividend Aristocrat in the Making

By Demitri Kalogeropoulos - Mar 6, 2018 at 5:22PM

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This retailer needs just three more years of dividend raises before it meets the 25-year threshold.

With its recently announced payout hike, TJX Companies (TJX 1.96%) extended its streak of annual raises to 22 consecutive years. That's shy of the 25-year record required to earn a spot in the exclusive Dividend Aristocrat club. Still, income investors shouldn't let that technicality keep them from buying shares of this growing -- and cash-rich -- retailer.

Here are a few good reasons to put TJX Companies on your dividend watchlist today.

Two women shopping for shirts.

Image source: Getty Images.

Solid growth

TJX Companies operates off-price retailers TJ Maxx, Marshalls, and HomeGoods in the United States. It also has a significant presence in Canada, Europe, and Australia, with international segments together accounting for about a quarter of revenue in the last year.

Each of these divisions logged solid growth in 2017. In fact, comparable-store sales in the core Marshalls and TJMaxx segment sped up to a surprisingly strong 3% rate over the holiday season. Healthy customer traffic during that competitive period pushed comps up 4% overall, lifting the full-year growth figure in 2017 to 2% and marking the 22nd consecutive year of positive comps for this retailer. 

Healthy profits

TJX Companies aims to pack its shelves with quality merchandise it can acquire at discount prices. These opportunistic buying opportunities can come from order cancellations at a full-price rival, for example, or from closeout deals tied to another retailer's consolidation moves.

TJX also uses its large sales footprint (over $35 billion in the past year) to take advantage of bulk purchase opportunities that smaller, off-price retailers couldn't accept.

TJX Gross Profit Margin (TTM) Chart

TJX Gross Profit Margin (TTM) data by YCharts.

This approach translates into consistently healthy profit margins. Bottom-line profitability expanded to 7.3% of sales last year from 6.9% in 2016. And while a big piece of that increase came from U.S. tax law changes, the retailer's gross margin held steady at about 29% of sales. That result, in the context of rising customer traffic, suggests TJX is having no trouble acquiring the right mix of merchandise at attractive prices.

Gushing cash

The retailer's earnings have been pressured lately by increased labor costs, and that trend isn't expected to slow down. TJX recently announced one-time annual bonuses for many of its employees along with new ongoing benefits including paid parental leave, retirement contributions, and longer vacations.

Yet management is still expecting profitability to move higher in 2018, with earnings rising by between 4% and 6% to between $4 per share and $4.08 per share.

At the same time, tax law changes promise to significantly boost cash flow in the core U.S. business while allowing it to repatriate cash it had been holding in international markets.

That stellar cash position means the company can invest aggressively in things like training and benefits for employees, along with other initiatives that improve the customer shopping experience. It also means investors can expect elevated direct returns ahead, both from dividends and share repurchases. TJX announced a 25% hike to its dividend in late February while also targeting as much as $3 billion of buyback spending in 2018, compared to $1.6 billion last year.

The retailer is projecting to grow comps at a 2% rate this year, which, if achieved, would mark its 23rd consecutive year of growth while likely supporting another solid dividend increase in 2019. At that point, TJX would be just two more payout hikes away from Dividend Aristocrat status, but investors don't have to wait until then to start benefiting from its brightening cash and profit outlook.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.

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The TJX Companies, Inc.
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