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TJX Officially Suspends Dividend But Commits to Resuming Payouts Once Conditions Stabilize

TJX Companies (TJX) reported earnings on Thursday and officially suspended its dividend through at least the second quarter.

The off-price retailer closed all of its stores and online businesses in mid-March, resulting in an unprecedented decline in sales and cash flow.

On March 20, we downgraded TJX's Dividend Safety Score to Borderline Safe given risk that stores would stay closed for a longer period of time, increasing the company's need to preserve liquidity:

However, if management begins to believe that its stores may be closed for much longer than two weeks, it's not beyond the realms of possibility that the dividend could be temporarily suspended to preserve cash out of an abundance of caution.

On April 9, we downgraded the company's Dividend Safety Score to Unsafe as it became clearer that store closures would persist and TJX had recently said it was not planning to declare a dividend for the first quarter.

TJX's sub-2% dividend yield didn't make it much of an income play, but the stock was still popular with dividend growth investors since it had increased its payout each year since going public in 1987.

Management is "fully committed" to paying dividends once the environment and TJX's business stabilize, but we would be surprised if the prior dividend amount were reinstated in full any time soon.

TXJ burned through over $3 billion in cash last quarter, though that figure will improve going forward as more stores reopen and cost-savings actions kick in.

Assuming there is no second wave and the economy continues reopening, we believe it's possible that a new dividend could be declared by early 2021.

By that point we will know more about COVID-19's prevalence during the flu season, and TJX would be through the critical holiday shopping season, hopefully bolstering its financial position.

It's still early days in the recovery, but initial signs are encouraging that TJX's business could bounce back somewhat quickly.

The company has reopened more than a third of its stores worldwide, and initial performance has been strong.
 
In fact, for the 1,100-plus stores that have been opened for at least a week, sales overall have been above last year across all states and countries where we are open. 

We believe these strong early trends speak to our values on a wide selection of merchandise serving a wide customer demographic, also the loyalty of our valued customers and pent-up demand.

– CEO Ernie Herrman

TJX's business model should theoretically do well in this environment. 

The carnage across brick-and-mortar retail could create a lot of excess inventory available for purchase at a discount. 

The unstable employment backdrop also makes the "off-price" channel's value proposition all the more appealing.

With more stores reopening and early indicators looking positive, we don't have any major concerns about TJX's liquidity or overall financial health either.

Management believes the firm has adequate cash even if sales were to be down close to 50% over the last 9 months of this fiscal year. And TJX's A credit rating from Standard & Poor's positions it to tap debt markets, if needed.

Besides the pace of economic recovery, investors should also monitor a potential increase in competition in the off-price retail market.

Everyone is saddled with excess inventory due to store closures, and off-price was a hot market before the pandemic.

Other retailers may look to evolve into this space, but it's too soon to say if this has potential to dent TJX's long-term outlook for growth.

Looking ahead, we are open to replacing TJX in our Long-term Dividend Growth portfolio with a company that has a stronger dividend profile. 

We previously decided to hold our shares of TJX despite the dividend suspension risk because we felt the firm's long-term outlook hadn't changed and its valuation appeared undemanding.

TJX's stock price is now basically back to where it was when COVID-19 was declared a pandemic on March 11. That's impressive performance compared to other apparel retailers and department stores such as Kohl's, Macy's, and Gap.

However, the valuation case isn't as compelling of a reason to continue holding. And with meaningful dividends unlikely to return for at least several quarters, TJX isn't a great fit with our portfolio's objective to deliver relatively fast dividend growth.

We will send out an email if we decide to part ways with our position in TJX before our next newsletter is published on June 5.

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