TJX (NYSE:TJX) stock got a big boost on Tuesday, as the company announced a strong dividend increase of 20%. TJX is building an impressive track record of dividend growth, and the company has what it takes to continue raising dividends for years to come. Companies with growing dividends tend to materially outperform the market over the long term, so things are moving in the right direction for investors in TJX stock.
Show me the money!
After the latest increase, TJX's quarterly dividend rises to $0.21. This represents a forward dividend yield in the neighborhood of 1.2%, which is not particularly exciting in terms of income. On the other hand, dividend growth can be more important than dividend yield from a total return perspective, and TJX is building an impressive track record of rising payments.
TJX has accumulated 19 consecutive years of consistent dividend growth under its belt. This is no small achievement, especially for a company operating in the always cyclical and aggressively competitive retail business.
Some companies tend to increase dividends by small amounts, only to keep up with inflation and build a track record of dividend growth over time. But that is not the case when it comes to TJX: Dividends have grown at a vigorous compound annual rate of 23% annually through the last 19 years.
Besides, TJX has an active share buyback policy. The company has implemented 16 buyback programs since 1997, and it has allocated nearly $14.4 billion to repurchases over the years.
Management has recently received authorization to repurchase up to $2 billion in common stock, which represents approximately 4% of the shares outstanding at current prices. This comes in addition to $1.3 billion remaining from the previous buyback program. During the fiscal year ending Jan. 30, 2016, TJX intends to repurchase between $1.8 and $1.9 billion in common stock.
More dividend growth coming
TJX is the biggest retailer of off-price home and apparel fashions on the world. The company operates nearly 3,400 stores the U.S., Canada, the United Kingdom, Ireland, Germany, and Poland.
TJX sources for products from over 17,000 vendors in more than 100 countries, and this scale allows the company to negotiate conveniently low prices with suppliers. TJX translates its negotiating power into pricing discounts of between 20% and 60% versus traditional retail prices.
The business model resonates remarkably well among consumers through good and bad economic times, so TJX has delivered rock-solid financial performance over the years. Comparable-store sales have increased in each and every year through the last 18 years, and earnings per share are growing rapidly. Adjusted earnings per share grew 12% in fiscal 2014, marking the sixth consecutive year with double-digit earnings-per-share growth.
During the year ending on Jan. 31, 2015, the company produced nearly $3 billion in operating cash flows. Capital expenditures absorbed $911 million of that money, which means that free cash flow during the year was roughly $2.1 billion. Dividend payments demanded only $466 million, so TJX has more than enough financial strength to sustain dividend growth over the long term.
Why you should invest in dividend growth stocks
Dividends don't only provide income to investors, they also say a lot about a company's fundamental quality and financial strength, and this has some big implications in terms of total returns over the years. You need a solid business generating consistently growing cash flows to sustain dividend growth over time, so investing in dividend growth stocks is one of the most powerful and time-proven strategies to beat the market.
According to data from Goldman Sachs, a $10,000 investment in nondividend-paying stocks in 1972 would have grown to $30,363 by the end of 2014. Dividend-paying stocks did much better, as the same amount of money invested in dividend stocks would have turned into $461,904 over that period.
Still, companies with consistent dividend growth outperformed both dividend- and nondividend-paying companies by a considerable margin: A $10,000 investment in dividend growers from 1972 to 2014 would have turned into a much bigger $630,024.
Dividend growth investing is a simple and powerful strategy for superior returns. TJX is building an amazing track record of growing dividends, and everything seems to be indicating that the company has enough strength to continue increasing distributions over the long term. This discount fashion retailer looks dressed for success.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.