TJX Pays Back its Shareholders

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

TJX (NYSE: TJX) has become so profitable that its managers have decided to further reward their shareholders, which makes this company a great choice for long-term investment. With many investments paying little interest, while gas and food prices continue to soar, companies that offer their investors dividends have been attracting more attention. TJX has demonstrated a history of paying out larger dividends. Its cash flow statement shows dividend payments of $177 million for the year ending in January 2009, with an increase to $198 million the next year, and then $229 million in the year after that.

Higher dividend payments are not the only reward that TJX offers to its shareholders. The company has also decided to use its excess cash reserves to buy up some of its stock, which will place additional upward momentum on the company's stock price. Again, TJX has shown a long-term tendency to buy back stock as well. The January 2009 annual cash flow statement shows buyback costs of $609 million, which rose to $775 million the following year, and $1.017 billion the next year.

TJX is uniquely positioned to take advantage of two trends. Department store shoppers who have cash available to spend want to buy luxury brands, increasing the sales of chains that cater to the luxury market. At the same time, many shoppers remain cautious because of the economy and job market, so they continue to shop at discount stores.

TJX allows shoppers to purchase luxury brands at unusually low prices. Other retailers that fail to sell all of their inventory sell their out-of-season clothes to TJX to at least earn some money from the clothing. Because of its unique positioning, TJX can attract wealthy shoppers who are looking for better deals while retaining its main customer base, value shoppers. TJX controls two discount clothing chains, flagship TJ Maxx and Marshalls, which provide the bulk of its income. The company also owns stores that sell household goods and appliances, HomeGoods and the Canadian HomeSense, which insulate it from weakness in the clothing segment.

TJX does trade at a price to earnings ratio that is higher than several of its competitors. At a ratio of 18.64, TJX sells for more of a premium than its competitor Kohl's (NYSE: KSS) at 11.50. Earnings growth is likely the reason for this premium. While TJX strongly improved on its Q4 2010 results, announcing 6 percent higher revenue and 42 percent higher profits, Kohl's reported a 0.3 percent revenue drop, compared to 4Q 2010. Kohl's also reported higher margins than TJX, but TJX has the potential to improve its margins if its revenue continues to rise. Unlike TJX, Kohl's has not paid any dividends in the last few years, although it has started to buy back some of its stock. Kohl's reported a $929 million stock buyback on its January 2011 annual cash flow statement, although it sold $50 million in stock in each of the two previous years.

Dillard's (NYSE: DDS) has one of the lowest price to earnings ratios of any department store chain, at 6.91, which is less than half of the ratio for TJX. This Arkansas-based department store chain is smaller than Kohl's and TJX, with 308 stores. In comparison, Kohl's has 1,127 stores and TJX has more than 2,000 stores in the United States across all of its brands, and several hundred stores in Canada and Europe, so the company has more than 2,800 stores in total. TJX has a slightly higher dividend yield over the past five years, at 1.50 percent, than the 1.30 percent that Dillard's reported over the period, and Dillard's has reduced its dividend payout recently. Like its competitors, Dillard's has also been willing to buy back its stock, reporting $397 million in buyback costs on its January 2011 statement and $491 million in buyback costs when it released its statements in 2012. Dillard's is trading near the top of its annual range because it just released a very strong 4Q earnings report, improving its profits from $1.75 per share in 4Q 2010 to $2.77 per share this year. With its low price to earnings ratio, Dillard's remains a great bargain.

The Motley Fool owns shares of Dillard's. enovinson has no positions in the stocks mentioned above. 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.

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