TipRanks Smart Dividend Newsletter – Edition #19
Hello and welcome to the 19th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is one of the world’s largest off-price retailers, uniquely positioned to thrive in good and bad economic conditions. Its strong earnings growth and rising shareholder compensation make it one of the most compelling investments in the consumer discretionary sector.
But first, let us present a brief investment thesis, supporting our recommendation.
Investment Thesis: Value for Money
The economy is looking shaky; the prospects of a downturn, or even a recession, have risen. However, even in the most difficult times, one thing remains constant: people still need to dress themselves and furnish their homes. In these times, when many consumers are trading down, retailers that can offer exceptional value for every dollar spent, are in high demand.
Some companies have mastered the know-how of efficiency, being able to offer a haven for shoppers who refuse to compromise on quality while watching their budgets. It’s a simple yet powerful equation: a dedication to sourcing products smartly, negotiating the best prices, and passing those savings on to the customers. It’s about delivering high-quality goods at prices that defy market trends and expectations.
These companies have weathered economic storms with resilience, showcasing not just profitability but a commitment to shareholder value. Their dividend histories and share buyback strategies stand as testaments to their dedication to investors.
Quality Dividend Stock: This Week’s Top Pick
The TJX Companies, Inc. (TJX) is an American multinational off-price department store corporation. The company is a leading retailer of low-price apparel and home fashion products in the U.S. and worldwide. It is the world’s ninth-largest retailer by market capitalization with a 70% market share in the U.S. off-price retail market.
The TJX Companies, Inc. was founded in 1976 as an off-price apparel and home goods division of Zayre Corp. In 1989, TJX became the legal successor to Zayre following a company reorganization. TJX continued to grow steadily over the years, opening stores in new markets, countries, and continents, launching new chains, and acquiring other retailers in the U.S. and abroad. Today, TJX is a Fortune 500 company, commanding a market cap of $101.7 billion, with a workforce of 330,000 in 9 countries. The company runs more than 4,800 physical stores and seven e-commerce websites (online stores).
TJX operates through four segments: Marmaxx (home of the T.J. Maxx and Marshalls brands), HomeGoods, TJX Canada, and TJX International. More than 75% of the annual revenue is derived from the U.S., while Europe is responsible for 12%, and Canada for 10% of total revenue, while the remainder is derived from Australia.
In the U.S., in addition to T.J. Maxx and Marshalls, the company runs the HomeGoods, Sierra, and HomeSense stores, and online stores of these brands. TJX Canada runs Winners, HomeSense, and Marshalls concepts. TJX International is responsible for T.K. Maxx and HomeSense brands, as well as for several online stores. Despite recent years of growth in online presence, e-commerce still accounts for only about 3% of total sales.
T.J. Maxx and Marshalls brands focus on apparel, footwear, and accessories, as well as home furnishings and décor; these brands represent TJX’s largest revenue segment. The second-largest segment is home goods, such as furniture and other home items, which are sold through HomeGoods and HomeSense brands. Apparel and footwear account for about half of the company’s global revenues, while home goods account for almost 40%.
TJX has one of the most flexible and adaptive business models, allowing it to succeed in better and worse economic conditions. It sells a vast variety of goods, which it buys on an opportunistic basis from thousands of vendors worldwide. The company’s buyers find opportunities with overproducing manufacturers, overbought stores, and others, negotiate the lowest possible prices, and pass savings on to consumers. TJX sells at prices that are 20% to 60% lower than at full-price retailers. These discounts are made possible by the company’s strong inventory buying power, efficient no-frills stores, as well as constant assortment renewal – which means holding no replenishment stock, i.e., lower operating costs. The constantly renewed product stock helps to repeatedly draw treasure-hunting customers to the stores, as well as to immediately react to shifting customer demand and changing trends.
This business model supports TJX Companies’ great performance in both strong and weak economies. When the times are good, TJX’s customers spend more; when the economy softens, the company’s stores attract additional customers who choose to trade down (and who often continue buying at TJX when the economy improves). In the past two decades, U.S. shoppers have been becoming more and more price-sensitive in all economic conditions, and the advance of online retail has considerably strengthened the trend of quality-for-less shopping. The company’s exceptionally wide product portfolio caters to a very broad customer population.
The company’s business model’s strength is reflected in its stellar financial health and operational excellence. While the company’s total debt-to-equity ratio is a medium-low 43%, TJX has more cash than its total debt. Debt is covered by operating cash flow many times over.
Moreover, TJX’s profitability and capital efficiency metrics compare exceptionally well with its peers. Its Return on Assets (ROA) of 14% is twice the average for the industry, while its Return on Equity (ROE) of 66.3% is outstanding across all market sectors. The company’s gross margin of 32%, operating margin of 10.1%, and net profit margin of 7.8% compare well with its peers in the industry.
TJX has been growing revenues at a CAGR of 15% in the past three years, while EPS rose at a CAGR of 80%. In fiscal Q2 2024 (ended July 29th), the company’s EPS and revenues exceeded analyst expectations, as they did in 4 out of five previous quarters, with one-quarter of results matching estimates. In the last quarter, TJX reported an impressive 8% net increase in revenues year-over-year, driven entirely by a surge in customer traffic. Net income jumped by 22.1% year-on-year, and earnings-per-share surged by 23.2%, a third consecutive quarter of double-digit EPS growth. Following impressive FQ2 results, the company’s management raised its outlook for the whole fiscal 2024 sales, profit margin, and EPS.
TJX’s robust financial health and strong profitability support its strategy of returning capital to its shareholders. The company has paid quarterly dividends since 1987. Before the Covid crisis, the company had continuously raised its dividend for 24 years; in 2020, due to lockdowns that led to a sharp plunge in revenues, the company suspended payouts for two quarters, swiftly returning to dividend increases as the pandemic measures were expected to be pulled back. Dividend per share grew at a CAGR of 40% in the past three years and at a CAGR of 12.3% in the past five years. Cumulative five-year dividend growth is around 80%. The latest dividend increase was in May 2023, when the payout rose by 13%.
The company’s current dividend yield is 1.5%, higher than the Consumer Discretionary average of 1%. Its low payout ratio of 37% indicates sufficient resources to continue raising dividends while retaining enough capital to invest in business growth.
In addition to dividends, TJX returns capital to its shareholders through buybacks on an opportunistic basis. During fiscal Q2, the company repurchased $550 million in stock, retiring 6.7 million shares. That, after purchasing shares for the amount of $500 million in fiscal Q1 2024. The company’s management announced that TJX plans to repurchase shares worth $2-$2.5 billion in the fiscal year ending February 3, 2024. The company remains committed to returning cash to its shareholders while continuing to invest in the business to support the near- and long-term growth of TJX.
Taking into account robust finances, sturdy earnings growth, strong market position, an optimistic outlook, and generous shareholder compensation, it’s of no surprise that TJX’s stock has been outperforming the S&P 500 (SPX). The stock has risen by over 43% in the past 12 months and 67% in the past three years, versus the SPX’s 17% and 30%, respectively.
As a result of this outperformance, TJX is now trading on the more expensive side of the consumer cyclicals’ range. Its TTM P/E of 26 and Forward P/E of 23.8 represent a steep premium to the sector’s average. However, the sector includes many struggling and much less profitable retailers, whose sales, in contrast with TJX, are declining. When compared to its direct competitors such as Ross Stores, Inc. (ROST), Burlington Stores., Inc. (BURL), and Fast Retailing Co. (FRCOF), TJX looks quite reasonably priced, given its much stronger market position and outlook, as well as much higher shareholder compensation.
TJX’s stock reached its all-time high on September 14th and has given back about 5% since then on profit-taking. While there might be a risk of further short-term decline, given the current general market turbulence and the strong rally in the stock in the past several months, the longer-term outlook is very positive. TipRanks’-scored top Wall Street analysts see an average upside of 13.6% for the stock in the next 12 months, with a number of them raising their target prices for TJX.
TJX’s stock has a TipRanks’ Smart Score rating of 8/10 (“Outperform”) with a “Strong Buy” recommendation:
To conclude, we believe that TJX, with its highly efficient business model, excellent execution, robust profitability, and rising market share, is well positioned to thrive in good and bad economic times while increasing shareholder capital returns. Therefore, we view TJX as a compelling income investment stock and a valuable addition to any long-term investment portfolio.
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