By Brian Sozzi
Wal-Mart (WMT) has been extra generous with its cash these days, recently hiking the dividend by 21% and repurchasing shares under a massive $15.0 billion authorization. At the end of 4Q11, approximately $4.8 billion was left for repurchase on the pre-existing authorization, with a new program, likely for a sum less than $15 billion, potentially in store for later this year. Wal-Mart executives are indeed trying to improve the total return profile of the stock seeing as core earnings growth is waning from sluggish U.S. sales and overall pressured margins. All told, and assuming Wal-Mart utilizes the remaining $4.8 billion repurchase authorization, about $23.0 billion will be distributed in the form of dividends ($5.0 billion; 39% of projected annual net income), capex (midpoint of $12.5 billion to $13.5 billion guidance), and repurchases. The capex number excludes the funds for the Netto deal ($1.2 billion) and Massmart deal (stake being taken for $2.3 billion). So, in light of the fledgling performance of the U.S. business, the highest debt to capital ratio since calendar year 2005, and the cash outflows of the business is Wal-Mart running the risk of having its credit ratings (commercial paper and long-term debt) reviewed for a downgrade by the ratings agencies? It's certainly a thought worth pondering.
High grade ratings are reserved for those businesses having excellent business risk and minimal financial risk. I would argue that each designation fit Wal-Mart just fine five years ago, but less so at present day.
The Wal-Mart of Today
- Buy for less and sell for less model championed by Wal-Mart is under siege from inflation in the company's sourcing backyard, China.
- Market share is being lost to U.S. dollar stores, online stores, and even large box competitors.
- Greater risk is being fed into the business via aggressive international investments.
Wal-Mart does have the advantage of donning the status of the world's largest retailer when it comes to being reviewed for a potential ratings downgrade, if it were to happen at all. Right now, the risk of the company being put on notice seems to be building as debt markets are tapped to fund international expansion, dividend increases, and share repurchases against a backdrop of weak U.S. sales and pressured margins. Any change in rating would obviously raise the cost of capital and place strain on net earnings.
- Wal-Mart has the highest debt to capital ratio at 39% in the big box retail sector, trailing only Target (TGT) at 50%. Companies used in this comparison include Home Depot (HD), Lowe's (LOW), Costco (COST), and Staples (SPLS).
- Wal-Mart garnered very attractive rates on two debt offerings in October of last year. Those offerings likely to be a benchmark for future offerings in terms of perceived risk in the business.