Brick and mortar retail is something that has struggled for years thanks to the rise of online based competition, especially from the likes of Amazon (AMZN).
However, that doesn’t mean that all retailers are created equal.
In fact, TJX Companies (TJX) in particular has spent decades not just successfully fending off the competition, but enriching long-term shareholders to an incredible degree.
TJX Companies has been one of the hottest stocks of the last two decades, tripling the S&P’s compound annual total returns.
However, while impressive past performance may grab one’s attention, what is most impressive about TJX is that the company’s growth runway appears to remain long and its dividend growth prospects very bright.
The company has raised its dividend for two straight decades at a double-digit annual pace and will almost certainly join the S&P Dividend Aristocrats in five years. Investors can learn more about dividend aristocrats and screen the entire list here.
Let’s take a look at why TJX seems likely to remain one of America’s best long-term dividend growth stocks and could deserves a place in your diversified income growth portfolio.
Founded over 40 years ago, TJX Companies has grown into the world’s largest off-price retailer, selling deeply discounted excess brand-name merchandise from other retailers.
TJX Companies’ core customer is a fashion and value conscious female shopper between 25 and 54 years old and making a middle to upper-middle income. This type of customer usually shops high-end and moderate department and specialty stores, as well as online.
The company’s primary chains are T.J. Maxx, Marshalls, HomeGoods, Winners, HomeSense, Trade Secret, and Sierra Trading Post, an off-price internet retailer of brand name merchandise.
By product category, apparel and footwear generated 55% of total sales in fiscal 2016, followed by home fashions (30%) and jewelry and accessories (15%).
Operating over 3,600 stores in nine countries on three continents, TJX has been the only off-price retailer to successfully expand overseas.
|Q3 2016 Sales
|% of Sales
|TJX International (Europe + Australia)
Source: TJX Earnings Release
That being said, TJX’s international expansion is still young with 76.4% of sales coming from the U.S.
While most retailers are highly cyclical with their fortune’s rising and falling with the economy, TJX’s business model of buying excess capacity merchandise from other retailers and offering it to customers at a 20% to 60% discount has proven a hit in both good economic times and bad.
In fact, since the company’s IPO there has been only a single year in which same store sales, or comps, declined. A combination of strong brands and reasonable prices has helped TJX power through almost all macro environments.
The strong consistency in comps, combined with steady expansion in its store count has resulted in not just highly consistent sales growth, but also overall revenue growth that is the envy of the retail industry.
The climb in TJX Companies’ net sales and profits has been steady and unstoppable for decades.
Combined with an aggressive share buyback program (3.9% CAGR over the last five years), this has helped TJX to post exceptional growth in the two most important metrics for dividend investors, EPS and free cash flow, or FCF per share.
Of course, what makes a great long-term dividend investment isn’t just impressive growth that is a result of financial engineering. What makes TJX such a great investment is its competitive advantage, which is the world’s largest merchandising sourcing system, made up of over 1,000 purchasing partners sourcing goods from over 18,000 vendors in more than 100 countries.
This allows TJX to make sure it has a large and varied supply of name brand merchandise it can offer to its customers. Many of its rivals do not have access to these vendor sourcing networks, and TJX’s relatively low selling prices makes it even harder for new competitors to copy the business and turn a profit.
Better yet, the company has spent decades fine-tuning its supply chain, including 20 state-of-the-art automated distribution centers, to make sure that each of its stores has the right product mix to meet local customer demand.
Another one of the company’s strongest competitive advantages is its enormous economies of scale. The way off-brand retail works is that a company will purchase excess merchandise from other retailers, and then offer them at a discount to consumers.
Because of its vast supply chain, as well as financial resources, TJX is able to make deals that other off-price retailers can’t match. This includes buying odd lot orders, paying immediately (instead of on credit), and waiving return rights for products it can’t sell.
This is all due to TJX’s proprietary merchandise management system, which uses vast amounts of store level and customer data (courtesy of its popular loyalty card programs) to know just what merchandise needs to go where to maximize the rate of turnover and minimize the need to offer discounts on its own merchandise.
Thanks to the success of this system, in fiscal 2016 TJX was able to turnover its inventory every 61 days, helping it to maximize its merchandise margins, which has led to a steady improvement in profitability over the years.
I generally prefer not to invest in the retail industry because consumers’ preferences and tastes are continuously evolving at such a fast pace, making it difficult for companies to create long-term competitive advantages.
However, TJX Companies is built for change. Inside the company’s stores, you will notice that there are no walls and almost all of its fixtures are on wheels, making it very easy to shift in and out of product categories.
When combined with its fast inventory turnover, TJX can quickly read and react to evolving consumer preferences, making sure it has the right products available at the right time (and at the right price).
From hard-hit customers to millionaires, TJX can efficiently flex its product line to capture an even wider customer demographic base while maintaining low inventory costs.
In other words, TJX is arguably the most flexible major retailer in the world that has found a way to thrive in virtually every environment. The sales growth charts previously discussed underscore this major advantage.
However, no investment is ever without risks.
While TJX Companies may be one of the premier retail stocks, nonetheless there are four main risks to be aware of.
First, while TJX may have been among the first off-price retailers, and thus has created a corporate culture that has mastered the art of brick and mortar retail even in the age of Amazon, that doesn’t mean that competition isn’t rising.
For example, Ross Stores (ROST), Kohl’s (KSS), and even traditional retailers such as Macy’s (M) have all tried to replicate TJX’s business model in recent years and decades. Thus far only Ross Stores has been able to do so successfully.
However, as other traditional retailers attempt to generate their own versions of what TJX has built, the risk is that the company may have a harder time finding sufficient quantities of name brand, dirt cheap merchandise to satisfy its customers. This could hurt future growth and profitability.
The second risk factor is replicating its North American success overseas.
As you can see, while same store sales are humming along nicely in the U.S. and Canada, growth in Europe and Australia has ground to a halt. That is due to a combination of factors, including slow economic growth in the EU, Brexit (and its massive negative currency effects), and the strong and rising dollar in general.
Now in fairness to TJX, its management team is truly among the best in the business, with CEO Ernie Herrman and Executive Chairman Carol Meyrowitz having been with the company since 1989 and 1987, respectively.
In other words, they have pretty much been with TJX since nearly the beginning, and if anyone can figure out how to whip European and Australian growth into line, it’s them.
International expansion brings us to the third risk, negative currency effects. Up until now TJX Companies has largely been a U.S. focused company, but in the coming years and decades, more growth will have to come from overseas.
A strong U.S. dollar could threaten sales, earnings, and cash flow growth, especially if the U.S. economy continues to be relatively stronger than its European counterparts.
That’s because faster economic growth requires higher interest rates to prevent high inflation, and global capital will naturally flow to where it can find higher rates. This can cause increasing demand for the dollar, causing it to strengthen and slow reported sales and earnings growth from overseas stores.
Finally, it’s worth noting that TJX Companies has more than 215,000 employees, many of whom work less than 40 hours per week. Potential changes to minimum wage laws and healthcare regulations could adversely impact the company’s cost structure and the amount of profits left for shareholders.
Management recently noted that wage increases will dent EPS growth by 3% in each of the next two fiscal years. However, it’s good that management is being proactive with worker pay, once again focusing on what’s best for the company over the long term.
Dividend Safety Analysis: TJX Companies
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their real-time track record has been, and how to use them for your portfolio here.
TJX Companies has a Dividend Safety Score of 99, making it among the safest dividends in America. This is a combination of two main factors.
First, TJX Companies’ EPS and FCF payout ratios are extremely low. Over the last 12 months, TJX’s EPS and FCF payout ratios are both 28%. This is a very healthy level that provides a great margin of safety and allows for healthy dividend growth.
Despite the company’s amazing dividend growth track record, its payout ratios have not been growing much over the years either. While TJX’s payout ratios have increased somewhat over the last decade, they have remained remarkably stable. In other words, TJX has fueled its dividend increases with growth in underlying earnings and cash flow.
In addition to its low payout ratios, TJX Companies’ dividend is very safe thanks to its recession-resistant business. The company’s sales grew each year during the financial crisis, it continued generating positive free cash flow, and you will remember the earlier statistic that same-store sales have only decreased one out of the last 40 years. TXJ’s stock also outperformed the S&P 500 by 10% in 2008.
The other important protective factor for TJX’s dividend is the company’s strong balance sheet. As you can see below, its current ratio is nicely above one meaning its current (i.e. short-term) assets easily cover its liabilities.
In addition, its interest coverage ratio is extremely high, meaning the company’s cash flow has no trouble servicing its debt. TJX even has more cash than total debt on hand and maintains an “A+” credit rating from S&P. Management has been very conservative with the company’s balance sheet.
In other words, TJX’s pristine balance sheet gives it access to very cheap debt that helps lower its cost of capital and generate some of the strongest margins and returns on investor capital in all of retail.
|Return On Assets
|Return On Equity
|Return On Invested Capital
Those high margins help keep TJX’s dividend extraordinarily secure and growing quickly.
Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
TJX Companies has a Dividend Growth Score of 99, meaning investors can expect very strong income growth in the years to come.
That’s not a surprise to longtime TJX investors, who have enjoyed some of the strongest payout growth in corporate America over the past two decades.
TJX Companies has increased its dividend for 20 consecutive years, including a 24% boost in March 2016. The company’s dividend has steadily grown by more than 20% annually over the last decade.
Of course, past performance doesn’t necessarily guarantee continuing excellence. Given the company’s large size, TJX’s growth is likely to slow some going forward.
That being said, management still sees plenty of growth opportunities in the form of a 50% increase in store count in the coming years, and that’s just from its current chains in its existing markets.
Combined with continuing improvements in its overseas supply chains, analysts expect TJX to continue growing its margins over time (by about 1% annually).
Combined with a 6% top line growth rate (1-2% comp growth plus 4-5% square footage growth), plus 2% to 3% annual buybacks, TJX Companies has potential to grow EPS and FCF/share at a high-single digit annual pace over the long-term.
With the payout ratio having plenty of room to expand, dividend growth investors can realistically expect around 12% to 14% dividend growth to continue for the next decade, assuming management’s expansion plans go as planned.
With TJX trading just 8% off its all-time high and commanding a 22.5x P/E multiple, this legendary dividend growth champ does not appear to be cheap today.
In fact, from a historical P/E perspective, TJX shares appear rather pricy. On the other hand, even at today’s lofty share price, TJX is still trading beneath the S&P 500’s average trailing 12 month PE of 26.0.
|13-Year Median P/E
|% Of Retailers With A Lower P/E
|13-Year Median Yield
|% Of Retailers With A Higher Yield
Perhaps more importantly to dividend growth investors, today’s dividend yield does represent a nice discount to the company’s median yield of 1.1% observed over the past 13 years.
I don’t view TJX as being a bargain today, but its valuation does not strike me as being unreasonable for a highly profitable business with numerous long-term growth opportunities and proven competitive advantages.
Given the quality of this company, I think it still makes sense for long-term investors to hold their positions and let management continue to compound the company’s earnings.
However, in terms of adding to a position (assuming you already own TJX or are looking to establish a new position), it might be a good idea to wait for a bit of a pullback; especially given how overheated the market has gotten in recent weeks.
Closing Thoughts on TJX Companies
TJX Companies has truly proven itself a standout in the retail industry over the past few decades. Very few retailers have survived for such a long period of time, much less compounded their earnings at a pace anywhere near TJX’s growth.
Thanks to a world-class and very shareholder-friendly management team, plenty of growth opportunities overseas, improving economies of scale, inventory advantages, and continued aggressive shareholder capital returns, TJX is a wonderful business that dividend growth investors with a long-term time horizon should keep an eye on.