When done right and given enough time to work its magic, dividend growth investing is an investment strategy that can help people achieve financial independence. This is defined as the point at which passive income meets or exceeds an individual's expenses.
Having recently raised its quarterly dividend per share by 12.7% to $0.3325, the off-price department store owner TJX Companies (TJX 0.45%) is by any measure a quality dividend growth stock. But should dividend growth investors scoop up shares of the stock right now? Let's gauge TJX's fundamentals and valuation to decide if the stock is currently a sale for investors.
The company is producing great results
Closing in on 5,000 stores falling under the T.J. Maxx, HomeGoods, Marshalls, Sierra, and Homesense brands in nine countries around the world, TJX is a well-known business. While there are cultural differences between the markets that TJX operates in, everybody appreciates a bargain. And given TJX's 1,200 savvy buying agents and decades of established relationships with over 20,000 vendors, nobody can deliver a bargain to customers quite like this apparel and home fashion retailer.
TJX's net sales increased 4.8% year over year to $14.5 billion in its fourth quarter ended Jan. 28. This sales growth is made even more impressive by the fact that the company faced a 2% foreign currency translation headwind during the quarter due to the strong U.S. dollar. Adjusting for this challenge, TJX's net sales grew by 7% on a constant currency basis for the quarter.
These results were largely driven by 4% U.S. comparable store sales growth in Q4. Along with a 3.1% increase in the total store count to 4,835 at the end of the quarter, this explains TJX's healthy top-line growth rate.
The retailer's diluted earnings per share (EPS) shot up by 14.1% over the year-ago period to $0.89 during Q4. Thanks to a 0.9% fall in selling, general, and administrative expenses for the quarter, TJX's net margin expanded by nearly 40 basis points to 7.1%. Coupled with a 2.8% reduction in its weighted average diluted share count, that's how the company's diluted EPS grew at a faster clip than net sales in the quarter.
Considering that TJX keeps costs under control and is opening new stores, analysts are projecting that the company's diluted EPS will rise by 11.6% annually over the next five years. For context, that is marginally above the apparel retail industry average earnings growth forecast of 10.8%.
Image source: Getty Images.
Significant dividend growth could lie ahead
TJX's dividend is one that income and dividend growth investors alike will both appreciate. For one, the stock's 1.8% dividend yield is slightly more than the S&P 500 index's 1.7% yield. Second, TJX's quarterly dividend per share has more than quadrupled over the last 10 years.
TJX Dividend data by YCharts
And with the dividend payout ratio primed to clock in below 38% for the current fiscal year ending next January, investors can be confident the dividend is quite safe. A low payout ratio gives TJX the capital needed to fund additional store openings, share buybacks, and debt repayment.
A well-deserved valuation
Shares of TJX have done quite well over the last year, gaining 22% during that time. Surprisingly, the stock still looks like a buy, however.
TJX's forward price-to-earnings (P/E) ratio of 19.2 isn't much greater than the apparel retail industry average forward P/E ratio of 17.3. Factoring in the company's above-average growth potential and leadership as an off-price retailer, this is arguably a favorable entry point for dividend growth investors.
