Everyone loves a good sale. When quality merchandise is available at a discount, people get very excited.
However, when stock prices go down, many investors get terrified and refuse to invest.
Today I am going to discuss two promising companies, which are selling at attractive valuations. Both of those companies are retailers. As you know, retailers are in a tough spot today, because the story goes, online will eat their lunch. It is very true that retail is very difficult business, which is under constant threat from new innovators. However, some retailers are still doing well.
These two retailers have been increasing the number of locations over the past five to ten years. In addition, they have plans to further grow their location footprint in the US and worldwide. This is a good indication of growth. As I discussed before, a growing number of retail locations is one of the indicators we talked about in how to select winning retail stocks.
Each of those dividend achievers has managed to increase dividends for over 20 years in a row. Looking at a long streak of annual dividend increases is the first step in the process however.
The next step in the process is obtaining those businesses at attractive valuations. We do not want to overpay for securities. I require a margin of safety, in case something goes wrong. As was the case for the acquisition of Whole Foods, you can lose money if you pay a very high multiple for a business, and your assessment of the valuation and growth of fundamentals turns out to be wrong.
The companies I am discussing today are TJX Companies and Ross Stores. Both branded quality fashion at discounted prices.
The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer in the United States and internationally. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX International. TJX Companies is a dividend achiever, which has increased dividends to shareholders for 21 years in a row. Over the past decade, the company has managed to hike dividends at an annual rate of 22%/year. The high dividend growth was supported by high earnings growth – earnings increased from 83 cents/share in 2008 to $3.46/share in 2017. TJX Companies is expected to earn $3.88/share in 2018. Future growth in earnings per share will be driven by opening new stores, increasing same store sales, increasing margins, lowering costs and repurchasing shares. Check my analysis of TJX for more information about the company. The stock is selling for 18 times forward earnings ( or 20 times last years earnings). The stock yields 1.80% today. Assuming we get a good growth going forward, this company could generate good returns to shareholders and high future yields on cost.
Ross Stores, Inc. (ROST), together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd’s DISCOUNTS brand names in the United States. Ross Stores is a dividend achiever, which has increased dividends to shareholders for 23 years in a row. Over the past decade, the company has managed to hike dividends at an annual rate of 24.60%/year. This was supported by strong earnings growth – earnings increased from 48 cents/share in 2008 to $2.83/share in 2017. Ross Stores is expected to earn $3.16/share in 2018 Future growth will be aided by opening new stores in the US, as well as starting international expansion like competitor TJX Companies. Check my analysis of Ross Stores for more information about the company. The stock is also selling for 18 times forward earnings ( or 20 times last years earnings). The yield is low at 1.10%, but this is typical of high dividend growth companies, which could deliver high returns and high future yields on cost for patient long-term investors.
The share price for both companies recently declined after Amazon decided to launch a service that lets customers get clothes online, and return the ones they do not like free of charge. It is widely feared that this would reduce customer traffic to traditional retailers like Ross Stores and TJ Maxx or Marshall’s. I think that we should all fear Amazon (especially when they start their Amazon Dividend Growth site later this year). The problem however is that people who come to the physical stores enjoy the process of treasure hunting. These customers get the fun out of hunting for branded clothes on sale, followed by the instant gratification of taking them home to wear. The other problem is that these two brick and mortar stores have limited one-time promotional items for sale, which creates a sense of urgency for the customer to take the deal right away. In addition, many of the branded clothing companies do not permit the display of discounted prices for their merchandise online, because this erodes the brand value. This is one of the reasons why these specialty retailers are not really that big online. It makes sense that if you are selling unsold inventory of Ralph Lauren shirts, you want this to go on quickly and without much public record. You do not want those discounted prices to be displayed online.
I believe that these companies are decent values today, particularly if they could keep growing. Even if their future growth rate slows down to half the historical growth rate over the next decade, these companies represent good values today. They may be even better values at valuations around 15 – 16 times earnings or lower. If we get enough of the chicken littles to get gloomier about the prospects of traditional retailers, I would start to get excited.
After all, everyone loves a good sale at their favorite stores. When quality merchandise is available at a discount, people get very excited and open their wallets wide open.
However, when stock prices go down, many investors get terrified and refuse to invest.
Full Disclosure: Long TJX and ROST
Relevant Articles:
- How to select winning retail stocks
- Dividend Achievers Offer Income Growth and Capital Appreciation
- TJX Companies (TJX) Dividend Stock Analysis
- Ross Stores (ROST) Dividend Stock Analysis
- How to value dividend stocks