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Summary

  • Wal-Mart has a market cap of $244 billion and a current yield of 2.5%.
  • The dividend coverage ratio for the six months ending 7/31/14 indicates capacity to raise the dividend.
  • The recent earnings release discusses further investments in e-commerce and Neighborhood Markets, a smaller footprint store initiative.

The scope of this article will look at the financial health of Wal-Mart (NYSE:WMT), and the ability to continue to pay the dividend. The company recently released earnings for Q2 of FY 2015. The current dividend yield of 2.5% and the ability to raise the dividend mandates that dividend growth investors give this stock another look.

How Safe is the Dividend?

Q2 FY 2015 Cash flow summary ($ in Billions)

Six Months

ending 7/31/14

Six Months ending 7/31/13

Cash from operations

$11.9

$11.3

Payments for property and equipment (capex)

($5.1)

($6.1)

Dividends

($3.1)

($3.1)

Purchases of company stock

($0.9)

($4.1)

The company had cash on the balance sheet of $6.2 billion at 7/31/14. For the most recent six month, WMT generated $6.8 billion in adjusted free cash flow, or cash from operations minus capex. The dividend coverage ratio is the free cash flow over the dividend, or 2.2x for Q2 FY 2015.

For comparisons on other large cap dividend coverage ratios, see this article on AT&T (NYSE:T) or this article on Starbucks (NASDAQ:SBUX).

The cash conversion cycle is the amount of time between a company spending cash and receiving cash per each sale. It is a measure of efficiency and how long cash is tied up in working capital. The purpose of the below chart is to understand the success of management running the global operations of this retailing behemoth.

Has Competitive Pressure Hurt Wal-Mart?

Amounts in Millions of $

FYE 1/31/14

Six Months

ending 7/31/14

$473,076

$233,503

Sales (excludes membership income tied to Sam's Club)

$6,677

$6,146

A/R

5.2

4.8

(1) Days receivables {(Receivables/Sales)*365}

FYE 1/31/14

Six Months

ending 7/31/14

$358,069

$176,724

Cost of Sales

$44,858

$45,451

Inventory

45.7

46.9

(2) Days inventory {(Inventory/Cost of Sales)*365}

FYE 1/31/14

Six Months

ending 7/31/14

$358,069

$176,724

Cost of Sales

$37,415

$38,828

Accounts Payable

38.1

40.1

(3) Payable Days {(Acct. payable/Cost of Sales)*365}

12.8

11.6

Cash conversion cycle {1+2-3}

A Brief Discussion on Neighborhood Markets

In other articles about Target (NYSE:TGT) and Amazon (NASDAQ:AMZN), I've looked at the competitive pressures that Walmart faces. Wal-Mart also faces new challenges from bare-bones outlets including Germany's Aldi and chains such as Dollar General (NYSE:DG). Low-cost rivals have expanded exponentially since the recession, offering small sizes of staple items such as milk and toilet paper to attract strapped consumers who, in some cases, could not afford the super-sized versions of the items sold at Wal-Mart.

On the most recent conference call, WMT executives emphasized a focus on investments in both e-commerce and in Neighborhood Market formats.

The prospect of Wal-Mart stores dotting America's biggest cities would change the urban landscape and the profile of the world's largest retailer, known for its blocky suburban edifices stocked with low-cost goods. The new stores, roughly a quarter to a third the size of a supercenter, largely will sell groceries.

In Q2 FY 2015, the Neighborhood Markets continued to perform well and delivered an approximately 5.6% sales comp. This exceeded the performance of the Wal-Mart U.S. segment, indicating that smaller stores in cities are a growth option for WMT management. During the second quarter, WMT opened 22 Neighborhood Markets and remains on track to deliver 180 to 200 new units for the year

Guidance

WMT's financial guidance reflects a view of global economic trends and assumes currency exchange rates remain at current levels. Forecast earnings per share from continuing operations for the full year are expected to range between $4.90 and $5.15, versus previous guidance of $5.10 to $5.45.

The financial guidance includes incremental investments in e-commerce and headwinds from higher health-care costs in the U.S. than previously estimated.

Conclusion

Based on the above Dividend Coverage calculations, I believe that WMT could raise the dividend by another 10% and still have a 2x dividend coverage ratio.

WMT sells at a discount to the stock market in terms of P/E and dividend yield. Currently, WMT trades at a below market P/E Ratio (Trailing Twelve Month ratio of 15.5x). The company has a strong dividend of 2.5%, compared to S&P 500 current yield of 1.77%. The stock represents a Hold at these levels.

WMT faces multiple risks in its business, including intense competition from other websites and retailers that were not within the scope of this article. This article is the opinion of the author and does not represent investment advice.

Source: Wal-Mart's Ability To Raise The Dividend