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Wal-Mart Stores, Inc (NYSE:WMT) recently announced its 41st consecutive annual dividend increase. This did not get much attention because of two reasons: 1) The dividend increase was not stellar, at just 2%. 2) Wal-Mart's Q4 results were released that same day and the negative sentiments from it took the stock down about 2%. The company also guided down for the next quarter.

The focus of this article is on the latest dividend increase and what the future returns could look like from an income stand point. Let us get into the details.

New Yield: The new yield for Wal-Mart stands at 2.60%, which is well below the 3% yield of the other dividend paying retailing giant, Target Corp (NYSE:TGT).

Current Payout: The new dividend of $1.92 gives Wal-Mart a payout ratio of about 40%. This is a very comfortable number for any company and especially so for a company that has been increasing dividends for 4 decades.

5-Year Dividend Growth Rate: In spite of the disappointing 2% increase, the 5-year dividend growth rate stands at an impressive 12.14%. This is on the back of 3 double digit increases in the last 5 years.

(Source: Yahoo Finance)

Panic Time? Maybe. Maybe Not: A 2% dividend increase is what investors have come to expect from the telecom companies given their high payout ratios and capital expenses. But Wal-Mart's payout ratio, earnings, and cash flow are usually way too strong to justify a 2% dividend growth.

  • The 2% dividend increase is the lowest in the last 30 years at least. The table below shows the dividend growth rate for the past 32 years.
  • There have only been 5 years in the past 32 years that the dividend growth rate was less than 10% and those are highlighted below.
  • A worrying aspect is that 3 out of those 5 instances have been since 2008. This might signal a slowing dividend growth rate going forward.
  • A positive trend for investors from the table below is that Wal-Mart has increased dividends by double digit percentages the years before and after every single digit increase. For example, the 7.14% increase in 2002 was sandwiched between a 16.67% and a 20.00%. The 9.04% in 2012 was between two increases of 18.09% and 20.46%. Perhaps a huge double digit increase is waiting next year as well going by that trend. Of course this is just an observation from the data below and the actual dividend increase will be dependent on earnings and the company's confidence as well.

(Source: Yahoo Finance)

Extrapolation: While the 2% dividend increase is disappointing, the low payout ratio plus Wal-Mart's free cash flow should comfort investors that the average dividend growth rate will still be reasonable. The table below uses a 7% annual dividend growth rate and the yield on cost will double to yield more than 5% for the patient investor.

(Source: Current share price and dividend data from Yahoo Finance)

Forward Looking Analysis and Conclusion: Wal-Mart's struggles are well documented. Increasing labor costs, a pressurized middle class, and increasing competition from online retailers are a few of the well-known issues. And these aren't going anywhere soon. At the same time, investors must also realize that this company is now perhaps way too big and omnipresent to show continuous organic growth.

That said, the stock still does have a lot of positives.

  • A low beta of 0.37 makes it a stock to own in all market conditions.
  • With cost cutting as well as international growth, earnings are expected to grow at 8% per year over the next 5 years. That should put the earnings per share at $7. Even if the company maintains the low 40% payout ratio, the annual dividend per share will grow to $2.87 from the current $1.92.
  • A mean price target of $82 according to 25 analysts on Yahoo Finance. That represents an upside of 12% in addition to the dividends.

Final Takeaway: The latest 2% dividend increase by itself is not enough reason to sell the stock. History shows that there have been periods of low increases that are followed by high increases. This seems like a "wait and see" step by the company. Perhaps it is a bit concerned about the economy and does not want to over commit to the shareholders only to disappoint them later. A safer approach one must say?

Source: Wal-Mart's 'Disappointing' 2014 Dividend Increase