The most recent dividend increase was in February 2015, when the Board of Directors approved a 2% increase in the annual dividend to 49 cents/share. This was the second year in a row that Wal-Mart delivered a small dividend increase. It is likely that management does not expect high earnings growth in the next couple of years, given by the very low hike in distributions in 2014 and 2015.
The largest competitors for Wal-Mart include Target (NYSE:TGT), Costco (NASDAQ:COST) and Dollar General (NYSE:DG).
Over the past decade this dividend growth stock has delivered an annualized total return of 7.30% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.
The company has managed to deliver a 7.60% average increase in annual EPS over the past decade. Wal-Mart is expected to earn $4.78 per share in 2016 and $5.01 per share in 2017. In comparison, the company earned $5.01/share in 2015. The fact that earnings per share are expected to stagnate for the next two years, after stagnating for the preceding two years, provides a plausible explanation why dividend growth has slowed to 2%/year.
Wal-Mart has consistent history of share repurchases. The company has been able to reduce the number of shares outstanding from 4.188 billion in 2006 to 3.243 billion by 2015. I would have honestly preferred special dividend distributions, rather than the “forced dividend reinvestment” that share buybacks provide for investors.
Wal-Mart has a wide moat, since it is the lowest-cost retailer. Its sheer scale gives it a pricing advantage in negotiating with suppliers and its investment in technology allows it to gain further efficiencies across its value chain, thus offering lowest prices in a market. The moat is further strengthened by the fact that many consumers perceive the retailer as having the lowest prices, even if that might not be the case in all categories. Another nice thing to note about Wal-Mart is that the majority of merchandise is sold before the company pays its suppliers, due to constant monitoring of sales and inventory. Therefore, it enjoys the type of float where it essentially earns money without the need for too much capital.
The company has recently refocused its strategy on maximizing return on investment from existing US stores, rather than focusing exclusively on square footage growth. By remodeling stores, and improving their ambiance, it could not only retain its shoppers but even attract different target groups. Its everyday low prices strategy in the US allows the company to match prices by competitors on items that happen to have lower prices that Wal-Mart. It would take a competitor a considerable investment in a number of stores, distribution centers, technology and logistics in order to emulate Wal-Mart's business model.
The opportunity in the US is through opening smaller Neighborhood stores, which will compete with dollar stores. The company is also pursuing an effort to grow its online sales. It offers something that Amazon does not have -- the ability for the consumer to order online and pick up in store. That extra store traffic could also result in additional sales at the physical location.
Its international segment however is expected to have low double digit growth in square footage. International currently represents an important opportunity for growth, as it only generates one-third of the company's revenues. Future growth in its international segment could come from acquisitions, as well as organic growth. Wal-Mart is just getting started in certain key markets such as China and India, for example. The combination of rising populations, increasing per capita incomes and providing an efficient retailing experience are some of the characteristics that could fuel growth in international.
The annual dividend payment has increased by 13.90% per year over the past decade, which is much higher than the growth in EPS. This was possible mostly due to the expansion in the dividend payout ratio. Future growth in dividends will likely match the rate of increase in earnings per share.
A 14% growth in distributions translates into the dividend payment doubling every five years on average. If we check the dividend history going as far back as 1976, we could see that Wal-Mart has actually managed to double dividends almost every three years on average.
In the past decade, the dividend payout ratio increased from 22.40% in 2006 to 38.30% in 2014. High dividend growth above the rate of earnings growth was achieved through the expansion of the dividend payout ratio. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The return on equity has remained largely between 20% and 24% over the past decade. I generally like seeing a high return on equity, which is also relatively stable over time.
Currently, Wal-Mart is attractively valued at 15.10 times forward earnings, and has a dividend yield of 2.70%. I believe that Wal-Mart has what it takes to be successful, and endure changes over the next 20 years. Unfortunately, the company is so large that its future profits growth might not be that high. Given the paltry 2% dividend increases we have received in the past two years, I would venture to say that future returns might be dissatisfactory to investors. If I were starting a position today, Wal-Mart would not be a company I would consider. That being said, I will hold on to my existing position, but allocate any dividends received elsewhere.
Full Disclosure: Long WMT and TGT
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