Are Walmart’s Investors Looking at Subdued Dividend Growth?
The Earnings Report We've Been Waiting For: Walmart in Fiscal 2016
Walmart announces dividend hike
On February 18, 2016, Wal-Mart Stores (WMT), or Walmart, announced that its dividend will increase to $2 per share in fiscal 2017, up 2% from $1.96 last fiscal year. This is the 43rd straight year of dividend increases by the retailer. Walmart is a dividend aristocrat, one of a select group of S&P 500 Index companies that have raised their dividend for at least 25 straight years, recessions notwithstanding. The company has raised its dividend since 1974.
Dividend growth and payouts
That being said, the pace of dividend increases has been slowing, and the payout ratios rising. That’s partly due to the growth investments the retailer is targeting, and partly due to negative growth in net income last fiscal.
Walmart’s 2% dividend increase in fiscal 2017 is way short of its five-year CAGR (compounded annual growth rate) for dividends. Over the period fiscal 2011 to fiscal 2016, Walmart’s dividends grew at a CAGR of 10.1%.
The dividend payout ratio has also risen—from ~29% in fiscal 2011 to ~43% in fiscal 2016—and these factors could herald a period of even slower dividend growth in the future, particularly if earnings growth is negative.
Walmart was providing a forward dividend yield of 3.1% as of February 18, higher than the S&P 500 Index’s (SPY) (IVV) (VOO) 2.4% and the S&P 500 Food & Staples Retail Index’s (XLP) (FXG) (VDC) 2%. Fellow dividend aristocrat (SDY) (FVD) (NOBL) Target (TGT) was also yielding 3.1%, while Costco Wholesale Corporation (COST), the Kroger Company (KR), Dollar General (DG), and Whole Foods Market (WFM) were yielding 1.2%, 1.2%, 1.2%, and 1.8%, respectively.
Share buybacks
Walmart’s cash generating ability is still robust. It plans to deploy excess cash in returning value to shareholders via share buybacks. Walmart generated free cash flow of $15.9 billion last fiscal year and repurchased 62 million shares for $4.1 billion during that period.
However, worryingly, the company’s future share buybacks—under the $20 billion two-year program it announced at its 2015 Investor Day—are already factored into the EPS decline, which is projected to occur in the next couple of years.
In the next and final part of this series, we’ll analyze Walmart’s recent stock price.
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