Thanks to a variety of economic and geopolitical factors, risks of a global recession in 2023 are mounting. Even so, there are still plenty of smart things that investors can do to position themselves well for the future.
If a global recession does indeed hit next year, more shoppers will turn to bargain retailers. And as a top off-price retailer, TJX Companies (TJX 3.50%) could be a great pick for dividend growth investors. Here's why.
Holding up in a highly inflationary environment
Best known for its T.J. Maxx, HomeGoods, Sierra, and Marshalls store brands, TJX is the largest apparel retailer in the world. How has the company become the most dominant apparel retailer on the planet with a $90 billion market capitalization?
If you're like most people, you love a good bargain when shopping for apparel and home fashions. Offering 20% to 60% off of full-price retailers' regular prices, TJX has store brands that are popular with millions. The company has decades of experience in the off-price retail industry, too. Along with TJX's tremendous buying power and a vendor base of 21,000, it has the ability to buy quality merchandise at a discount and pass those savings on to customers.
TJX's net sales dipped 2.9% year over year to $12.2 billion during its third quarter, ended Oct. 29. While investors never want to see a revenue decline, this wasn't a terrible result when viewed with proper context. Inflation has taken a toll on consumers over the past year and counting. And as wages haven't kept up with increases in the cost of living, consumers have had to cut back on discretionary purchases like apparel to stay afloat financially.
Accordingly, TJX's U.S. comparable sales fell 1% for the quarter. Hurt by COVID-19-related store closures in Europe and Australia, international comparable sales fell 16% from the year-ago period. These headwinds were only partially offset by a 1.2% year-over-year increase in store count to 4,793.
TJX's diluted earnings per share (EPS) surged 8.3% higher over the year-ago period to $0.91 in the third quarter. Because of a 4.9% decline in selling, general, and administrative expenses, the company's net margin grew nearly 60 basis points to 8.7%. As a result of a 3.6% reduction in TJX's diluted share count, diluted EPS grew at a faster clip than net sales.
Given a rising store count and greater cost management, analysts believe that TJX's diluted EPS will grow at an 11.9% annual rate over the next five years.
Image source: Getty Images.
Strong future dividend growth potential
Compared with the S&P 500 index's 1.7% dividend yield, TJX's 1.5% yield may seem a bit lacking for income investors. But I believe investors with time to let the dividend compound will be glad they did.
That's because TJX's dividend payout ratio is going to come in around 37% for its current fiscal year. Since this payout ratio is low enough for TJX to finance future store openings, repay debt, and repurchase shares, the dividend should grow at a double-digit clip annually over the next few years.
TJX is worthy of its premium valuation
TJX is a steadily growing business. And the underlying stock valuation also looks to be attractive for dividend growth investors. The stock's forward price-to-earnings (P/E) ratio of 22.2 is only marginally above the apparel industry average of 20.2. Given that TJX's annual earnings growth potential of 11.9% is superior to the industry average of 10.4%, the stock's above-average valuation is well deserved.
