One of the most important realizations you can ever have as an investor is that most of your stock picks will probably never work out. Between 1990 and 2018, just 45% of all stocks generated any gains for shareholders. This is what makes it critically important to your prospects of success as an investor to buy only top-notch businesses for your portfolio.
The off-price retailer TJX Companies (TJX -1.52%) arguably fits this requirement. A $10,000 investment in the stock made 10 years ago would now be worth almost $36,000 with dividends reinvested. For context, that is above the $31,000 that the same investment amount placed into the S&P 500 index would be valued at today with dividends reinvested.
Let's delve into TJX's fundamentals and valuation to better understand why the stock currently remains a buy for dividend growth investors.
TJX sells unique products at no-brainer price points
TJX is an off-price retailer that provides customers with styles that customers appreciate at prices they love across the following brands: T.J. Maxx, Marshalls, Sierra, HomeGoods, and Homesense. How can the company source enough inventory to supply its nearly 4,900 stores around the U.S., Canada, Europe, and Australia?
In its nearly half-century as a business, TJX has grown to 1,200 buying agents cultivating relationships with more than 20,000 vendors in 100-plus countries throughout the world. This vast reach to vendors, coupled with the company's buying power that it leverages in negotiations, has made its business model a tremendous success.
| Metric | Q1 2023 | Q1 2024 |
|---|---|---|
| Total store count | 4,715 | 4,865 |
| Net margin | 7.1% | 7.6% |
Data source: TJX Q1 2024 earnings press release and TJX Q1 2023 earnings press release.
TJX's net sales edged 3.3% higher over the year-ago period to $11.8 billion during its fiscal first quarter ended April 29. Persistent inflation has meaningfully harmed many of the company's customers in the last year and counting. Yet, TJX's customers were undeterred from buying the retailer's products in the quarter. Its great product offerings at consumer-friendly prices contributed to a 3% growth rate in its comparable store sales for the quarter.
TJX's non-GAAP (adjusted) diluted earnings per share (EPS) rose at an 11.8% year-over-year rate to $0.76 during the fiscal first quarter. The company's total cost of sales and selling, general, and administrative expenses grew at a slower rate (2.9%) than net sales. This explains how its net margin expanded by 50 basis points in the quarter. Along with a decline in the company's share count, this is why adjusted diluted EPS increased at a more rapid clip than net sales for the quarter.
Thanks to TJX's significant vendor base and the demand for its stores, the company has a long-term store target of nearly 6,300 worldwide. This is how analysts believe that TJX's adjusted diluted EPS will compound by 11.3% annually over the next five years. Putting this into perspective, that is in line with the apparel retail industry average annual earnings growth forecast of 11.5%.
Image source: Getty Images.
Massive dividend growth can persist
At first glance, TJX's 1.7% dividend yield doesn't seem particularly enticing in comparison to the S&P 500 index's 1.6% yield. But because the quarterly dividend per share is four times greater now than it was 10 years ago, TJX is too good for dividend growth investors to pass up.
The company's dividend payout ratio is set to come in around 36% in the current fiscal year concluding next January. Such a modest payout ratio leaves TJX with the capital necessary to keep growing its business, repay debt, and complete share repurchases. That is why I am expecting more of the same strong dividend growth from the company moving forward.
The valuation is a buy
Shares of TJX climbed 35% over the last year. But since the stock began its ascent as deeply undervalued, TJX remains sensibly valued. Yet, TJX's forward price-to-earnings (P/E) ratio of 19.8 is only moderately more than the apparel retail industry average forward P/E ratio of 17.4. This is why, in my opinion, the stock is still a buy for dividend growth investors at the current $78 share price.
