What happened
Investors have become excited about the stock of TJX Companies (TJX -0.06%) following a string of economic data that bodes well for retailers. The company has been delivering strong earnings results, and investors are getting bullish about its dividend growth potential. Unexpectedly strong economic indicators sent TJX 10.4% higher in June, according to S&P Global Market Intelligence.
So what
In March, the company -- whose retail chains include T.J. Maxx, Marshalls, and HomeGoods -- announced a 13% increase to its quarterly dividend. That drove share prices higher over the past few months as the dividend yield drifts back down to normalized levels.
TJX dividend yield data by YCharts.
TJX reported impressive quarterly earnings in May. The company's same-store sales only grew 3%, but profit margins surged higher thanks to some nonrecurring items and modest improvements to gross margin. The discount retailer's $0.76 in earnings per share was higher than Wall Street's projections.
Strong profit performance is fueling speculation that TJX could comfortably increase its dividend in the future. Its payout ratio is only 36%, and its operating cash flow was more than double its cash dividend.
The company is comfortably funding shareholder cash distributions at their current level and has sufficient financial health and produces plenty of cash to meet its financial obligations, so those factors don't pose a threat to dividend growth.
Image source: Getty Images.
This all set the stage for upside potential when bullish economic data is released, which is exactly what happened throughout June.
The Consumer Price Index (CPI) indicated a 4% increase, showing that inflation is cooling for consumers. Jobs data showed that unemployment ticked slightly higher, but it remained fairly low at 3.7%. Meanwhile, consumer confidence achieved one of the highest levels since January 2022, indicating that very few consumers now expect a recession to occur over the next 12 months.
These are all positive indicators for consumer spending over the next few months, and they suggest that the Fed's interest rate hikes might actually address inflation without triggering an employment shock.
That's a huge improvement over previous expectations for consumers, and retailers like TJX could benefit tremendously. This is one of the most intriguing stocks in the industry due to its potential dividend growth, so it can generate real momentum from relevant economic indicators.
Now what
There are plenty of reasons to be bullish about the retailer's outlook and fundamentals, but the stock doesn't look undervalued. TJX's forward price-to-earnings ratio is now 23.7, which is near the high end of its recent historical range. The 1.5% dividend yield isn't among its highest recent historical levels, either.
TJX should be compelling to investors seeking a relatively stable stock that has an opportunity for strong dividend growth in the medium term.
