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TJX Companies(TJX-N)
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Buy This Winning Dividend Growth Stock and Forget About It

Motley Fool - Mon Aug 28, 2023

We're all bound to make mistakes as investors. Successful investors are the ones who learn from those mistakes and consistently put more capital to work in quality investments. By doing this, it's a near inevitability that just about any investor will build meaningful wealth.

Discount retail conglomerate TJX Companies(NYSE: TJX) is a good example of one of these quality investments. Someone buying $5,000 worth of TJX stock a decade ago would now be sitting on a $19,220 holding (with dividends reinvested). That performance tops the $16,340 holding that the same invested amount in the S&P 500 index would now be worth (again, with dividends reinvested).

The retail brand manager also looks like it has what it takes to keep outperforming the broader market. Let's examine TJX Companies' fundamentals and valuation to learn why.

TJX is providing value to customers

Operating almost 4,900 Marshalls, T.J. Maxx, Sierra, Homesense, and HomeGoods stores throughout the world, TJX sells brand-name, designer merchandise to customers at 20% to 60% discounts compared to what it would sell for at a full-price retailer. As demonstrated by the company's recent results for its fiscal 2024 second quarter (concluded July 29), this business model benefits both customers and shareholders.

MetricQ2 2023Q2 2024
Total store count4,7364,884
Net margin6.8%7.8%
Diluted share count1.18 billion1.16 billion

Data source: TJX Companies.

TJX's net sales grew by 7.7% year over year to $12.8 billion in Q2. The seemingly irresistible value proposition the company offers its customers helped comparable store sales increase 6% during the quarter. This solid growth rate is driven by higher customer traffic, which is a testament to how much TJX's customers appreciate its bargains. Coupled with an expanding store presence, this is how the retailer recorded robust top-line growth for the quarter.

Moving down the income statement to the bottom line, TJX's diluted earnings per share (EPS) surged 23.2% higher over the year-ago period to $0.85 in the fiscal second quarter. Slower growth in total expenses helped the company to expand its net margin by roughly 100 basis points during the quarter. Combined with a lower share count due to share repurchases, this is what led diluted EPS growth to outpace net sales growth for the quarter.

As TJX opens more stores and focuses on growing in profitability, the future should be promising. That is why analysts anticipate that the company's diluted EPS will rise by 12.9% annually for the next five years -- similar to the apparel retail industry average of 13.6%.

A person looks in the mirror while holding a shirt.

Image source: Getty Images.

TJX has double-digit percentage payout growth potential

TJX's 1.5% dividend yield isn't flashy (it's just a bit under the S&P 500 index's average 1.6% yield). But the company jumps off the page in terms of dividend growth: TJX boosted its quarterly dividend per share by over 70% over the past five years.

There is reason to believe that similar dividend growth can continue in the years ahead. The retailer's dividend payout ratio is expected to be less than 35% for the current fiscal year ending in January 2024. That payout ratio should give the company the flexibility to invest in store openings, reduce debt, and hand out low-double-digit annual dividend growth to shareholders for the foreseeable future.

TJX is a wonderful business at a sensible valuation

Trading up 11% so far in 2023, shares of TJX still seem to be a compelling value for dividend growth investors. The stock trades at a forward price-to-earnings (P/E) ratio of 21.7, which isn't much more than the apparel retail industry peer average of 19.2. That's hardly an excessive valuation premium for a leading apparel retailer such as TJX. For this reason, it isn't surprising that analysts have assigned an average 12-month share price target of $99 to the retailer's shares. From the current $88 share price, that would represent a respectable 12% upside.

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Kody Kester has positions in TJX Companies. The Motley Fool recommends TJX Companies. The Motley Fool has a disclosure policy.

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