Recession performance can provide additional clues about the safety of a dividend. Fortunately, Wal-Mart’s business is very recession-resistant because consumers continue to purchase many essential items such as groceries.
Wal-Mart’s sales and free cash flow per share grew during the financial crisis, and WMT’s stock returned 20% in 2008, outperforming the S&P 500 by nearly 60%. It will take more than an economic downturn to endanger Wal-Mart’s dividend.
Source: Simply Safe Dividends
Analyzing Wal-Mart’s balance sheet is also very important to understand the company’s dividend safety. Companies with high financial leverage will always make their debt and interest payments before issuing dividends. If times get tough, the dividend is usually the first thing to go in order to preserve capital.
Wal-Mart’s balance sheet is in good shape. The company could retire its total book debt using cash on hand ($7.7 billion) and just 1.7 years’ worth of earnings before interest and taxes (EBIT). Wal-Mart also maintains strong investment-grade credit ratings on its debt.
Source: Simply Safe Dividends
Overall, Wal-Mart’s recent growth struggles do not impact the safety of its dividend. The company has increased its dividend every year since first declaring a dividend in March 1974. Wal-Mart’s size and dividend growth streak in excess of 25 years places it among the exclusive group of Dividend Aristocrat stocks.
While dividend growth has slowed in recent years (see below), the company’s healthy payout ratios, solid cash flow generation, recession-resistant business, and reasonable balance sheet all provide solid protection. Dividend growth will likely remain in the low-single digits until earnings growth picks up.
Source: Simply Safe Dividends
Closing Thoughts on Wal-Mart
Wal-Mart’s capital allocation strategy is undergoing a meaningful shift that will impact the company’s long-term future. Capital expenditures are continuing to shift away from new store openings in favor of e-commerce investments.
While this is the right move on paper, Wal-Mart’s results in recent years leave a lot to be desired. The company’s acquisition of Jet.com is another signal that Wal-Mart’s organic digital strategy is in need of help.
Investing more heavily in e-commerce is the right long-term move for the business, but shareholders could be left waiting for a number of years before seeing positive results. Wal-Mart has the scale and capital to be a force in e-commerce, but it is far from guaranteed to own the number two position behind Amazon thanks to the way technology has changed the game for businesses and consumers alike.
Wal-Mart’s dividend remains extremely safe, but the company’s 2.8% yield and 16.2x forward price-to-earnings multiple don’t excite me for a mature business struggling to reignite sustainable earnings growth.
I prefer to invest my capital in other blue chip stocks with equally safe dividends but brighter long-term prospects for earnings growth. For now, I will continue to steer clear of big-box retailers such as Target and Wal-Mart.
Warren Buffett sold nearly 30% of his stake in Wal-Mart Stores, Inc. (NYSE:WMT) last quarter, and perhaps he is also uncomfortable with the playbook Wal-Mart will need to execute over the next decade (see analysis of Buffett’s Wal-Mart trim and all of his dividend stocks here).
Disclosure: None
