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Plain Dividend Yield’s For Chumps: Wal-Mart Payout Growing at 16.9% a Year

Over the past five years. Wal-Mart (WMT) has boosted its dividend payout an annualized 16.9% during a stretch when inflation totaled just 8% or so. That’s a nice pickup in spending power.

This is part of a ten-part series on dividend growth looking at the S&P 500 Dividend Aristocrats that provide rising income to shareholders.

And let’s get one thing out of the way; this is one reliable dividend. Wal-Mart’s core payout ratio is below 32% and the cash-dividend payout ratio is 35%. Those healthy ratios despite the steep uptick in the dividend is what happens when you’re producing plenty of earnings and free cash flow:

WMT Free Cash Flow TTM Chart

WMT Free Cash Flow TTM data by YCharts

The current 2.3% dividend yield isn’t much different than what you can earn on high-quality corporate debt these days. But those corp bond payouts won’t move a penny; while Wal-Mart keeps pumping out the dividend increases. And that’s played a significant role in fattening shareholder wallets. The retailer’s total return is nearly five-times what S&P indexers earned over the past five years, as seen in a stock chart.

WMT Chart

WMT data by YCharts

If you’re a socially-responsible investor type, you mightn’t sniff around Wal-Mart’s stock. There’s no denying its hard-nosed labor practices, to say nothing of the New York Times expose last year of bribery run amok in its Mexican operations that continues to play out. On January 10th, two members of Congress said they had emails confirming CEO Michael Duke and other Wal-Mart honchos were made aware of the bribery allegations in 2005. The stock closed down 0.34% in a day when the S&P 500 rose 0.76%. Late last year Wal-Mart said it had also opened investigations into potential bribery issues in its Brazil, China and India operations.

For investors the most pressing issue is how Wal-Mart will stave off competition that has been eating into its market share for years. The percentage change in Wal-Mart’s EBIT Margin http://ycharts.com/glossary/terms/ebit_margin (Earnings Before Interest and Taxes) has lagged Costco (COST), Dollar General (DG) and Dollar Tree (DLTR). Only Target (TGT) counts as “doing worse” given that Amazon’s (AMZN) Jeff Bezos has made it clear he’s happy to forego short-term earnings to build out Amazon to swallow the world of retailing. Wal-Mart has also had a hard time establishing a dominant footprint as it roles out international expansion, and its profit margin abroad trails that of the domestic business.

Wal-Mart has announced plans to deliver $6 billion in price cuts to shoppers by 2017. That doesn’t bode well for profit margins, but the company says it will reduce operating expenses by one percentage point over the same stretch. And Wal-Mart knows how to keep shareholders happy even in face of gross earnings pressure. Over the past decade it has reduced the number of outstanding shares by nearly 24%. That has a nice way of boosting per-share earnings and making it easier to shell out strong dividend growth.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

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