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Is This Your All-Clear Signal to Buy Retailer Stocks?

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

Good news investors, the American consumer is back, or at least in a better condition than many had anticipated. If you go by last month’s retail sales report, you’d likely come to the conclusion that the consumer is in much better shape than many in the media had predicted coming into this year. On the heels of a widely positive report, should you "buy the news" and jump into these retailers?

The will of the consumer

As the sun set on 2012 and we turned the calendar to the new year, the media lit up with a string of worries facing the U.S. consumer. The fiscal cliff, payroll tax hike, and sequestration were just a few of the many concerns regarding the consumer. Since our economy is so heavily bent toward consumer spending, it was widely theorized that the average American would cling to their purse strings, and as a result, bring the national economic recovery to a grinding halt.

Fast forward to mid-March, and the story didn’t quite turn out that way. As a matter of fact, retail sales in the United States expanded at the fastest rate in five months in February. The results blew past economists’ expectations for a 0.5% gain, with sales increasing 1.1% during the month. Even core sales, which exclude things like gasoline, rose a stronger-than-expected 0.4%.

Focus on the winners

All this might bring you to the conclusion that we’re finally on some solid footing with regard to the consumer, and that now is the perfect time to look into retailer stocks. But not all retailers are created equal. It’s pivotal to understand who the best performers are.

Target (NYSE: TGT) operates more than 1,770 general merchandise stores in the United States, and just recently announced store openings in Canada. Target performed very well in 2012. Adjusted earnings per share came in at $1.65 in the fourth quarter of 2012, up 10.1% versus the same period the year prior. Full-year adjusted earnings per share were $4.76, up 7.9% from $4.41 in 2011.

Another clear retail winner is TJX Companies (NYSE: TJX), which showed positive sales momentum in February along with the broader retail sales report. Same-store and total sales grew 1% and 7%, respectively, in the four-week period ended March 2. The operator of TJ Maxx and Marshall’s stores has seen its shares climb more than 20% over the past 52 weeks and are now sitting near all-time highs. Indeed, the company’s performance has been as impressive as its stock price rally. TJX Companies reported spectacular adjusted earnings per share growth of 28% for full-year 2012, on the strength of a 12% rise in sales.

Of course, no conversation of retailers is complete without including Wal-Mart (NYSE: WMT) in the discussion. This king of retailers is one of the world’s true juggernauts. The company sells virtually everything, and operates more than 10,000 retail stores in more than 25 countries. Wal-Mart reported full-year 2012 total revenue of $469 billion, an increase of 5% versus the prior year.

Based on Wal-Mart’s fiscal 2013 results of $5.02 in earnings per share, the stock trades for a P/E ratio of slightly more than 14 times. In addition, the company expects fiscal 2014 profits to be in a range of $5.20 per share to $5.40 per share, meaning the stock trades at 13.5 times the midpoint of next year’s expected earnings.

Good sales growth, great shareholder rewards

What makes these retailers great isn’t just their superior operating performance, but also the fact that they are some of the most shareholder-friendly stocks out there. Target has raised its dividend 20% in each of the last two years. All told, last year the company returned more than $2.7 billion to shareholders through dividends and share repurchases, representing more than 90% of net earnings.

Not only has TJX’s stock soared over the past few years, but the company continues to consistently reward shareholders. On the same day of its earnings announcement, TJX also revealed its plan to repurchase approximately $1.3 billion to $1.4 billion of its own stock during the current fiscal year, as well as its intention to raise the common stock dividend by 26%. That marks the 17th consecutive annual dividend increase for the company.

In 2012, Wal-Mart returned $13 billion to shareholders in the form of dividends and share buybacks. Furthermore, in conjunction with the quarterly and full-year results, Wal-Mart announced it will increase its fiscal 2014 dividend by 18%. Wal-Mart has increased its dividend every year since the first declared dividend of $0.05 per share in March 1974, and the dividend has doubled over the past five years.

Ring the registers

Add it all up, and with this list you’ve got some of the market’s best-performing retailer stocks. The combination of the resilience of the U.S. consumer and the gradual recovery from the worst recession in decades, in addition to their superior performance, makes each of these stocks compelling buys. Going forward, the catalysts are there for future growth: the employment and housing markets continue to improve, signaling monthly U.S. retail sales growth may have further room to run.

Making things even better is the fact that these stocks aren’t expensive. They trade for reasonable multiples of their trailing twelve-month earnings. Each of them currently exchanges hands for around 14-17 times 2012 earnings, which is about on par with the valuation of the broader market. When you consider the dividends and share buybacks these stocks offer, it’s extremely difficult to make a case against any of them. Ride the strength of the American consumer with these great stocks.


Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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