There are a lot of companies that are cutting or suspending their dividends due to the coronavirus and collapse of oil prices. Some of the dividend cuts will be long-term. This is especially true for companies in the energy, travel, leisure, hospitality, or retail sectors. For instance, Helmerich & Payne (HP) cut its dividend after raising it for 47 straight years. I do not think the dividend will return to the previous value since oil prices are likely to stay depressed for years. Other companies are merely suspending their dividend temporarily. Most intend to return it to the normal value sometime in the foreseeable future. I put The TJX Companies (TJX) in that category. The surprising dividend suspension from TJX was not well publicized. The suspension probably caught most dividend growth investors by surprise. Nonetheless, it will happen in Q1 FY2021. This is after 24 years of consecutive dividend growth. Hence, this will most likely drop TJX from the List of Dividend Contenders and prevent it from becoming a Dividend Champion and likely a Dividend Aristocrat since the stock is in the S&P 500.
Overview of TJX Companies
TJX Companies is a discount retail chain. TJX opened its first stores in 1977 in Massachusetts as a subsidiary of Zayre’s. Zayre’s reorganized in 1989 and TJX Companies was the successor company. The company operates 4,529 stores in the U.S., Canada, UK, Ireland, Germany, Poland, Austria, Netherlands, and Australia. Major store brands include T.J. Maxx, Marshalls, HomeGoods, Sierra and Homesense, Winners, and T.K. Maxx. The company operates in four business segments: Marmaxx, HomeGoods, TJX Canada, and TJX International. In fiscal 2019, sales were approximately $41.7 billion. Revenue was about 76% from the U.S., 13% from Europe, 10% from Canada, and the rest from Australia.
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TJX Surprising Dividend Suspension
TJX has been a favorite of dividend growth investors. The stock has delivered 24 straight years of dividend growth. This has been combined with solid capital appreciation leading to good total returns. The trailing 5-year dividend growth rate is about 21.5% and the trailing 10-year dividend growth rate is roughly 22.4%. These are outstanding values. Even after the recent market downturn and bounce back giving ~25% drop in the stock price, TJX’s trailing 10-year and 15-year returns are over 15%. This is much higher than most indices and many other stocks.
TJX even announced a 13% increase to the dividend along with a multi-billion dollar share repurchase program in late-February. Of course, this was before the full brunt of the coronavirus hit the U.S. Before then the virus and its impact were largely confined to Asia. But the rising rates of infection in Europe and then the U.S. probably hit TJX fairly hard as a retailer focused on consumer discretionary items. Consumers pretty much put buying clothes and home goods on hold and focused on consumer basics and essentials.
On March 19, 2020 TJX announced that it was suspending its share repurchase program. The company also announced that it was evaluating its dividend program. TJX had closed all of its stores worldwide for two weeks. The company also closed its online stores. So, with no revenue coming in for the two week duration the actions to improve liquidity and strengthen the balance sheet were not surprising. Suspending share buybacks would save the company about $394 million per quarter based on 2019 levels ($1,575 million / 4 quarters) The specific statement was as follows:
To further strengthen its financial position and balance sheet, and maintain financial liquidity and flexibility, the Company is taking the following actions:
- Drawing down $1 billion from its revolving credit facilities.
- Suspending its share repurchase program.
- Evaluating its dividend program.
- Reviewing all operating expenses.
- Reducing capital expenditures.
The Company also announced today that it is withdrawing its first quarter and full year Fiscal 2021 financial guidance given on its February 26, 2020 earnings conference call. The Company is not providing an updated outlook at this time.
The fact that the dividend was not suspended, or cut was probably a result of TJX almost being a Dividend Aristocrat. In any case, the evaluation period was short. On March 27, 2020 TJX filed its annual report or ‘Form 10-K’ with the SEC and indicated that they would not pay the dividend. The actual wording was a bit odd and was located on p. 17 of the 10-K in the Risk Factors section and also on p. 25 and p. 34. The company has stated that it “…does not intend to declare a dividend…”. The dividend would cost TJX about $310 million per quarter (1,192 shares * $0.26). So, the impact on financial stability and the balance sheet during the coronavirus crisis is substantial. The actual statements are below:
Our business depends upon our operations to continue to generate strong cash flow to supply capital to support our general operating activities, to fund our growth and our return of cash to stockholders through our stock repurchase programs and dividends, and to pay our interest and debt repayments. For example, as a result of the ongoing COVID-19 pandemic, we temporarily closed our stores beginning in March 2020. We also suspended our share repurchase program. In addition the Company does not intend to declare a dividend for the first quarter of fiscal 2021, and we continue to evaluate our dividend program in the near term.
In addition, we do not intend to declare a dividend for the first quarter of fiscal 2021. We continue to evaluate our dividend program in the near term, while we remain committed to paying our dividends whenever the environment normalizes for the long term.
The Company does not intend to declare a dividend for the first quarter of fiscal 2021. As a result of the uncertainty surrounding the COVID-19 pandemic, the Company is evaluating its dividend program in the near term, while it remains committed to paying dividends whenever the environment normalizes for the long term.
When Will TJX’s Dividend Be Paid Again?
The statements above suggest that company will continue evaluating its dividend program on a quarterly basis. I doubt that the quarterly regular cash dividend will return to the normal value of $0.26 per share in Q2 FY2021. If anything, the second quarter will probably be worse than the first quarter in terms of revenue for most consumer discretionary retailers depending on the duration of store closures and ‘social distancing’. One simply cannot expect that the economy will return to ‘normal’ as soon as restrictions are lifted. More likely, the return to ‘normal’ will be a long-drawn-out process. Hence, I think that the more probable scenario is that the dividend is reinstated in increments. If we make the assumption that restrictions are slowly lifted in Q2 FY2021 in the U.S. and worldwide then it would possibly be the third quarter or fourth quarter before TJX’s dividend is reinstated.
On the other hand, if in some way the U.S. economy rebounds quickly. There is the possibility that TJX can make up the missed dividend in the first quarter. In this case, the company would not lose its Dividend Contender status and would become a Dividend Champion and Dividend Aristocrat next year. However, I view this scenario is unlikely.
Final Thoughts on TJX Surprising Dividend Suspension
TJX is a fairly well-run company that had years of consistent growth behind it and seemingly years of growth ahead of it. Before COVID-19, the dividend safety was excellent with a low payout ratio of roughly 35% in fiscal 2020 and a dividend-to-free cash flow ratio of about 38%. These are solid values and below my thresholds of 65% and 70%, respectively. The TJX dividend suspension was surprising and was probably unexpected for quite a few dividend growth investors. It will be interesting to track how this develops.
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As a final note, please take a look at my Coronavirus Dividend Cuts and Suspensions tracker. I update it every week. There are now over 134 companies on the list since mid-February.
Thanks for reading TJX Companies (TJX): Surprising Dividend Suspension!
You can also read Anheuser-Busch InBev (BUD): Dividend Cut, Yet Again.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.