The COVID-19 lockdowns hit the retail industry hard, causing stores to close for weeks and months, arguably an unprecedented challenge for many businesses. The pandemic didn't spare retailer The TJX Companies (TJX 0.77%); its business suffered, and management suspended the dividend, sacrificing a dividend growth streak that spanned decades.
But today, the company is back on its feet and should be on the radar for investors looking for a quality dividend growth stock. Here is why TJX can still be an excellent long-term investment.
TJX has a clever niche within the retail industry
TJX Companies owns several discount retail store brands for clothing and home goods, including TJ Maxx, Marshalls, HomeGoods, Sierra, and HomeSense in the U.S., plus some international brands in Canada, Europe, and Australia.
Discount retailers find merchandise from vendors, often clearance items, oversupplies, or other products manufacturers want to get rid of. TJX has a team of more than 1,200 people responsible for sourcing products from more than 21,000 vendors in 100 countries.
Traditional retail companies must deal with established supply chains, fulfillment, and set store layouts. TJX is putting up whatever it can find, and the product is constantly changing. It's an underrated difference between a discount retailer like TJX and a retailer like Walmart or Amazon.
The always-changing merchandise at TJX makes it more agile than a company like Walmart and gives shoppers a sort of "treasure hunt" sensation because you never know what you'll find this week.
TJX Revenue (TTM) data by YCharts
It's been a successful recipe for TJX, which enjoyed steady growth and profitability outside of the pandemic; you can see in the above chart how much lockdowns hurt TJX.
TJX's financials remain intact
But the dividend's suspension was done more out of caution than desperation. You can see below how management chose to build its cash balance in the face of uncertainty.
Management suspended the dividend, cut spending programs, suspended share repurchases, and tapped its credit lines to build up cash to more than $6 billion.
Investors can have their own opinion about the actions management took. Still, it's gotten the company through this tough stretch, and TJX has steadily unwound, paying down what it's borrowed and restoring the dividend.
TJX Total Long Term Debt (Quarterly) data by YCharts
TJX is back to putting cash in shareholder pockets. Today, the dividend yield is a solid 1.7%, and the dividend payout ratio is 72% of cash flow. The company also resumed share repurchases, spending $2.5 billion over the past year, reducing outstanding shares by almost 3%.
Is TJX stock a buy today?
The markets know that TJX has moved past its dark days; the stock has almost doubled since its low in March 2020.
TJX has grown earnings per share (EPS) by an average of 10% annually over the past decade, trading at a median price-to-earnings ratio (P/E) of 21. Analyst estimates put expected 2022 EPS at $3.18, valuing the stock at a P/E of 20.
Additionally, estimates call for 10% annual EPS growth over the next three to five years, so it seems that the stock is roughly on par with its long-term valuation and growth norms. There isn't an expected change in TJX's business that would warrant a much higher or lower valuation.
Buying shares would ultimately come down to your situation. A long-term investor with years ahead of them can do well buying a quality stock like TJX when it's reasonably valued, letting the growth of the business produce compound returns over the coming years. But if you're more short-term oriented, TJX would be considered a reasonably priced dividend stock but not a bargain.
