Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see The TJX Companies, Inc. (NYSE:TJX) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, TJX Companies investors that purchase the stock on or after the 11th of May will not receive the dividend, which will be paid on the 2nd of June.
The company's next dividend payment will be US$0.29 per share, on the back of last year when the company paid a total of US$1.04 to shareholders. Based on the last year's worth of payments, TJX Companies has a trailing yield of 1.7% on the current stock price of $60.41. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether TJX Companies can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see TJX Companies paying out a modest 38% of its earnings. A useful secondary check can be to evaluate whether TJX Companies generated enough free cash flow to afford its dividend. Dividends consumed 62% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that TJX Companies's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at TJX Companies, with earnings per share up 9.8% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. TJX Companies has delivered an average of 19% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Is TJX Companies worth buying for its dividend? Earnings per share growth has been modest, and it's interesting that TJX Companies is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. To summarise, TJX Companies looks okay on this analysis, although it doesn't appear a stand-out opportunity.
So while TJX Companies looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, TJX Companies has 2 warning signs (and 1 which is concerning) we think you should know about.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.