Off-price retail giant TJX Companies (TJX) may not have a sky-high dividend yield like some of its more troubled retail peers. Its current $0.23 quarterly per-share payout ($0.92 annually) equates to a 1.5% yield. However, the company has a long track record of dividend growth. In fact, it has raised its payout for 23 consecutive years, including an 18% increase earlier in 2019. Over that 23-year period, TJX has grown its dividend at a 22% compound annual rate.
TJX has been able to drive strong revenue and earnings growth for more than two decades, enabling this streak of dividend growth. The retailer’s recent Q3 earnings report showed that TJX’s earnings growth trajectory remains very favorable. This gives the stock ample potential for long-term share price appreciation and paves the way for many more years of dividend growth.
TJX rebounds after a brief stumble
In the second quarter, comparable store sales increased by “only” 2% at TJX, including flat comp sales at its fast-growing HomeGoods chain. This sales result was at the low end of the company’s guidance for 2%-3% comp sales growth in Q2. EPS rose 7% to $0.62, matching the high end of TJX’s outlook. However, investors weren’t impressed, as the retailer typically issues conservative forecasts that it can beat.
Fortunately, business trends improved significantly in the third quarter. TJX posted a 4% comp sales increase on top of a stellar 7% gain in the prior-year period, blowing by its forecast for a 1%-2% increase. Total sales rose 6.4% to $10.5 billion, despite a 1-percentage-point headwind from currency fluctuations.
Breaking down TJX’s performance by business segment, comp sales also rose 4% for the core Marmaxx segment, which consists of the T.J. Maxx and Marshalls chains in the U.S. and accounts for more than 60% of TJX’s revenue. Comp sales rose 1% for the HomeGoods business, 2% in Canada, and soared 6% for the international segment, which covers Europe and Australia.
Adjusted EPS rose 8% to $0.68, crushing the company’s EPS guidance of $0.63-$0.65. EPS would have been a penny higher excluding the impact of exchange rate volatility.
One key cost headwind is dissipating
Looking ahead to the fourth quarter, TJX expects to achieve a solid 2%-3% comp sales increase. Moreover, management is calling for EPS growth to accelerate, with EPS rising to between $0.74 and $0.76 from $0.68 a year ago: up 9%-12% year over year. Given management’s penchant for conservatism, there’s a good chance that EPS growth will surpass this forecast.
Lower freight costs represent a key tailwind enabling this acceleration in earnings growth. For the past couple of years, TJX has been coping with severe freight cost increases, as the robust U.S. economy boosted freight demand. Adding in the headwinds from rising labor costs and various growth investments, it was impossible for TJX to hold its profit margin steady, even as it posted strong sales gains.
However, TJX recently went through its annual freight negotiations and was able to secure meaningful savings, as last year’s freight shortage abruptly turned into a glut in 2019. Freight costs should remain a tailwind for the next several quarters, enabling stronger earnings growth if sales trends remain robust.
Long-term revenue and earnings growth potential
TJX has grown comparable store sales each and every year for nearly a quarter century: even during the Great Recession. It has done so while also adding stores at a rapid pace. This is a testament to the power and flexibility of its business model, which allows it to deliver value to consumers in all types of economic environments.
Last quarter, TJX’s global store count surpassed 4,500. However, management still sees room to grow that number by more than a third to 6,100 locations, even without entering any new markets or launching new retail concepts. As a result, TJX could continue to grow revenue at a 5%-7% compound annual growth rate for many years to come.
TJX also has long-term margin expansion potential that investors may not fully appreciate. Most notably, the profitability of its international segment has suffered lately due to exchange rate volatility, mainly related to Brexit. As the pound and euro have fallen against the dollar, the international segment’s operating margin has retreated from 8.2% five years ago to 5.4% last year. Despite strong comp sales growth, TJX International’s segment margin has fallen by another 0.6 percentage points year-to-date.
Management has hinted that once the uncertainty of Brexit dissipates and exchange rates stabilize, it should be possible to rebuild the international segment’s profit margin. Getting the segment’s profitability back to historical levels could boost EPS by $0.10 or more.
Additionally, tariffs have started to impact TJX’s profitability. However, over time, it should be possible to mitigate that headwind (or the tariffs may be lifted entirely).
Finally, the HomeGoods segment’s operating margin has deteriorated to an expected 10.4% this year, down from a peak of nearly 14% just three years ago. Some of this relates to investments needed to power the chain’s rapid growth. Some merchandise mistakes have added to the margin pressure this year. But both issues should be corrected sooner or later, providing an additional source of potential margin expansion for the next few years.
Thus, whereas operating income has grown at a compound annual rate of 4% over the past four years (slower than sales growth), TJX could quite plausibly grow operating income twice as fast over the next several years. Including the benefit from share buybacks, that would lift annual EPS growth back into double-digit territory.
Plenty of room for dividend growth
TJX’s annual dividend payments of $0.92 per share put its dividend payout ratio at a very safe 35% right now, based on the company’s full-year EPS guidance. Historically, TJX has usually been able to convert the vast majority of its book earnings into free cash flow, which also bodes well for dividend sustainability.
With annual EPS growth potentially poised to accelerate into double-digit territory as freight cost pressure and other earnings headwinds ease, there’s plenty of room for TJX to continue growing its dividend at a double-digit rate. Faster earnings growth could also send the stock even higher, even though TJX shares already trade for about 23 times the company’s projected current-year earnings.
Between its rising dividend and potential for share price appreciation, TJX stock is well-positioned to deliver above-average returns over the next several years.
Disclosure: I am/we are long TJX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.