Wal-Mart (WMT) Issues Disappointing Guidance. What About The Dividend? by Simply Safe Dividends

I came across a statistic last week that sounded unbelievable until I thought more about my own behavior.

In 2015, 205 million U.S. consumers shopped online. The growth of e-commerce is nothing new, and the number of online shoppers will continue to rise. I wasn’t surprised by this fact.

Instead, a recent survey caught my attention. It found that more than half of U.S. online shoppers start their product searches on Amazon. Amazing!

Wal-Mart

Amazon is increasingly the most convenient and cost effective shopping option for consumers. Approximately 55% of those surveyed check out Amazon first when looking for a product, representing an increase from 44% a year earlier.

As Amazon’s scale, breadth of inventory, and distribution network grows, it seems likely that the company will continue squeezing out other e-commerce players.

Indeed, the survey noted that search engines (e.g. Yahoo) saw their share of new online product searches decline from 34% a year earlier to 28% today.

Retailers were even worse as a starting point for online shopping, dropping from 21% to 16%.

The threat posed by Amazon to big-box retailers such as Wal-Mart and Target is nothing new. However, the impact Amazon is having should not be ignored.

Just this morning, Wal-Mart issued disappointing guidance for next fiscal year that called for earnings per share to remain approximately flat compared to consensus expectations for 4.4% growth.

The company also moderated its plans for new store openings. As seen below, new supercenter openings are expected to be almost cut in half from this fiscal year (60) to next (35).

Wal-Mart Source: Wal-Mart Press Release
In other words, Wal-Mart’s growth will increasingly depend on same-store sales and the company’s e-commerce activities. Additionally, fewer store openings reduces the company’s capital expenditures, driving free cash flow higher.

With over 90% of Americans already living within 10 miles of a Wal-Mart store, these actions should hardly come as a surprise.

Wal-Mart’s playbook for the next decade is certainly very different from the last. The company clearly realizes the importance of e-commerce and knows it is years behind Amazon.

I view Wal-Mart’s recent $3.3 billion acquisition of Jet.com, a fast-growing e-commerce business, as a sign of desperation to step-up its own digital capabilities.

Despite pouring billions into its loss-making web business, Wal-Mart’s online sales growth has slowed considerably over the last two years (Amazon continues reporting double-digit growth despite doing more online business than anyone else):

Wal-Mart Source: Bloomberg
Acquisitions often have many unintended consequences, and the relatively small scope of Jet.com hardly makes it look like Wal-Mart’s knight in shining armor. Jet.com’s revenue projection for 2020 is still a fraction of Amazon’s and eBay’s current sales.

Wal-Mart
[drizzle]
Source: Bloomberg
Nonetheless, Wal-Mart will continue to invest heavily in e-commerce, and this is ultimately the right move if it wants to keep its business relevant for the rest of the 21st century.

However, it says a lot about Amazon’s edge when the largest brick-and-mortar business in the world is finding itself so challenged to build momentum in e-commerce.

Of course, as I previously discussed, Wal-Mart is also challenged by rising labor and health care costs.

With new store growth screeching to a halt, e-commerce activities looking like they will continue losing money for years, the brick-and-mortar retail environment as competitive as ever, and labor force costs rising, Wal-Mart sure has its work cut out for it to sustainably grow earnings over the next five years.

Until Wal-Mart shows clearer signs that it can (profitably) become a viable number two player to Amazon in the e-commerce world, it’s hard for me to get excited about the business.

Other brick-and-mortar stores are also racing against the company, and it’s crucial for Wal-Mart to assert itself as a legitimate online player if it doesn’t want to bleed away its 250+ million customers over the next decade.

What does this mean for the company’s dividend?

Dividend Safety Analysis: Wal-Mart

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Wal-Mart’s dividend and fundamental data charts can all be seen by clicking here.

Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.

Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.

Wal-Mart

We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.

Despite its struggles for growth, Wal-Mart’s dividend remains extremely secure with a Dividend Safety Score of 99.

Wal-Mart’s strong safety score begins with its healthy payout ratios. The company’s dividend has consumed just 43% and 28% of its GAAP earnings and free cash flow, respectively, over the last 12 months.

Looking longer term, we can see that Wal-Mart’s free cash flow payout ratio has remained fairly steady over the last decade:

Wal-Mart Source: Simply Safe Dividends
While Wal-Mart’s underlying earnings might struggle to grow for the next year or so, they are unlikely to see a meaningful decline as well. In other words, Wal-Mart’s low payout ratios give the company great flexibility to continue paying (and modestly growing) its dividend.

The dividend is also supported by Wal-Mart’s reliable free cash flow generation. Despite sluggish growth in recent years, Wal-Mart’s mature business model continues throwing off record free cash flow. As new store capital expenditures continue to slow, free cash flow should remain solid even despite higher investments in e-commerce operations.

Wal-Mart Source: Simply Safe Dividends
Return on invested capital, or ROIC, is another important financial metric I look at to analyze a company. Businesses that earn a high and stable ROIC have better potential to record strong earnings growth because every dollar invested results in more profits. Furthermore, many companies with high returns often have some sort of moat, which helps a business pay dividends more reliably.

Wal-Mart has maintained a solid double-digit ROIC for many years. However, we can see its ROIC has declined more recently due to growth pressures, rising labor costs, and expensive e-commerce investments. Still, Wal-Mart’s ROIC is at a healthy level that supports its business quality.

Wal-Mart Source: Simply Safe Dividends
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

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