Walmart (WMT) – A Dividend Aristocrat

Walmart – A Dividend Aristocrat – Introduction

On May 18, 2021, Walmart Inc. (WMT) released its Q1 2022 earnings and held its earnings call. With the release of its quarterly results and updated FY2022 guidance, let’s determine if this is an opportune time to acquire shares of this Dividend Aristocrat.

A Dividend Aristocrat is a component of the S&P 500 Index with at least 25 consecutive years of dividend increases. On February 18, 2021, Walmart announced an increase in its quarterly dividend. This increase marks the 48th consecutive year of a dividend increase. Should Walmart increase its dividend in the next two years, it will join the exclusive Dividend King group of companies; a Dividend King is a company with 50 or more consecutive years of dividend increases.

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Walmart – A Dividend Aristocrat – Business Overview

Just about everyone who reads this post is, at the very least, somewhat familiar with Walmart. In fact, the vast majority of readers have likely purchased something from Walmart at some point in their life. Many, however, are not fully aware of the sheer magnitude of Walmart’s operations.

One of the best ways to gain an understanding of a company is to read the ‘Business’ section of a company’s 10-K (WMT – FY2021 10-K). Investors would also be wise to read the ‘Risk Factors’ section which follows the ‘Business’ section. This section provides a comprehensive overview of the risks and uncertainties, as well as other factors, that could have a material adverse impact on a business, reputation, financial results, financial condition and/or the trading price of the Common Stock.

In addition, WMT’s 2021 Fact Book released April 22, 2021 for its 22nd Annual Meeting for the Investment Community is a good condensed overview of the company.

Walmart – A Dividend Aristocrat – Financial Review

Q1 2022 Results and FY2022 Guidance

Walmart’s Q1’s Earnings Release is found here and the accompanying Earnings Presentation is found here.

Although Return on Investment is a non-GAAP measure, it is an important metric (see explanation below).

Walmart – Free Cash Flow (FCF)

FCF is also non-GAAP measure investors should analyze for the reason reflected below. Walmart includes in all its quarterly Earnings Presentations the manner in which it defines FCF.

The figures in Walmart’s Earnings Presentation are found in the Q1 2021 Condensed Consolidated Statements of Cash Flows.

Walmart consistently generates strong FCF. In FY2012 – FY2021, Walmart generated FCF (in billions of $ – approximately) of $11, $13, $10, $16, $16, $21, $18, $17, $15, and $26.

Walmart – A Dividend Aristocrat – Credit Ratings

Far too many investors overlook the risk aspect of their investment. Investments, however, should be viewed from a risk/reward perspective. This is why I look at the ratings assigned by the major rating agencies as part of my company analysis.

The current long-term unsecured debt credit ratings are:

• Moody’s – AA2 since March 6, 1996
• S&P Global – AA since July 25, 1983
• Fitch – AA since June 25, 2001

All three long-term unsecured debt credit ratings are the middle tier of the high-grade investment-grade category and are the 3rd highest credit rating.

These ratings define Walmart as having a VERY STRONG capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.

Walmart’s ratings satisfy my prudent investor profile.

Walmart – Dividends and Share Repurchases

Dividend and Dividend Yield

Walmart has increased its annual cash dividend every year since first declaring a $0.05/share annual dividend in March 1974. Walmart is a Dividend Aristocrat and two years shy of becoming a Dividend King. However, the dividend history on the company’s website currently starts in 2015; the dividend history on the NASDAQ site currently starts with the $0.47/share January 1, 2014 dividend payment date.

While Walmart does increase its dividend annually, the quarterly dividend increases in recent years have only been $0.01. These increases are less than 2% annually.

Walmart’s annual dividend increases occasionally fall short of the annual inflation rate in the United States.

This poses a challenge for investors who do not wish to liquidate their investments yet rely heavily on dividend income.

In Q1 2022, Walmart distributed ~$1.549B in dividends. By way of comparison, it distributed ~$1.529B in Q1 2021 and $6.116B in FY2021, $6.048B in FY2020 and $6.102B in FY2019.

On February 18, 2021, Walmart announced an annual cash dividend for FY2022 of $2.20/share payable in quarterly installments of $0.55/share. This is an increase of ~1.85% from the $2.16/share distribution in FY2021.

With shares trading at ~$142, the dividend yield is ~1.59%. In the image provided later in this post, we see this current dividend yield is well below that of the prior 10 years.

The current interest rate environment is somewhat different than the early part of the previous decade. If investors expect to achieve a 2.25% dividend yield from Walmart, for example, the share price would need to drop below $100. We are unlikely to revisit this share price unless we encounter something similar in magnitude to a Financial Crisis or another pandemic in addition to COVID-19, or some terrible company-specific event occurs (e.g. cybercrime). Investors should, therefore, become accustomed to a sub 2% dividend yield unless Walmart’s Board decides to significantly increase the $0.01/share quarterly dividend increases witnessed these past several years.

Share Repurchases

The weighted average diluted common shares outstanding in FY2012 – FY2021 is 3,474, 3,389, 3,283, 3,243, 3,217, 3,112, 3,010, 2,945, 2,868, and 2,847 (million shares). In Q1, Walmart repurchased ~$2.8B shares thus reducing the weighted average diluted common shares outstanding to 2.829B.

Share repurchases amounted to $2.625B in FY2021, $5.717B in FY2020, and $7.41B in FY2019.

Walmart repurchases shares from time to time under the share repurchase program authorized by the Board of Directors. All repurchases made in FY2021 were made under the $20B share repurchase program approved in October 2017 of which $3B of share repurchases remained as of January 31, 2021.

On February 18, 2021, WMT’s Board of Directors approved a new $20B share repurchase program which replaces the previous share repurchase program. Any repurchased shares are retired and returned to unissued status.

Walmart – Current Valuation

Updated EPS guidance for FY2022 calls for a single-digit increase and low double-digits when we exclude divestitures.

If we look at page 11 of 11 in the Q1 2022 Earnings Release, Walmart incurred a $0.57 unrealized and realized (gains) and losses on equity investments’ and a $0.15 incremental loss on the sale of its operations in the U.K. and Japan’ in Q1. When we account for these adjustments, WMT generated $0.97 in diluted EPS.

We can not merely extrapolate these results over the remaining 3 quarters in FY2022 because Q1 is typically not WMT’s strongest quarter. In addition, not all regions in which Walmart operates have returned to pre-COVID business conditions.

We also have to account for the sale of Walmart Argentina in November 2020, Asda in February 2021, and Seiyu in March 2021.

I, therefore, think it is preferable we use adjusted earnings estimates from analysts who cover Walmart to determine Walmart’s valuation.

In FY2021, Walmart generated adjusted diluted EPS of $5.48 and in Q1 2022 it generated $1.69. FY2022 adjusted diluted EPS guidance from 32 brokers is a mean of $5.97 and a low/high range of $5.80 – $6.29.

At Walmart’s FYE2021, shares were trading at ~$140. Using FY2021’s adjusted diluted EPS of $5.48, the historical adjusted diluted P/E is ~25.55.

Shares are now trading at ~$142 and using the adjusted earnings guidance from the brokers, we arrive at an adjusted diluted forward P/E range of ~22.6 – ~24.5; we get ~23.8 using the mean value.

A price under the mid $130s is more reasonable considering dividend and dividend growth will not contribute much to Walmart’s overall return.

We see from the image above, extracted from Walmart’s 2021 Fact Book presented at its April 22, 2021 22nd Annual Meeting for the Investment Community, that WMT’s valuation exhibits wild swings (note the PE ratio each year).

Even if we account for the impact of the Tax Cuts and Jobs Act (TCJA) enacted in December 2017 which distorted Walmart’s financial results relative to historical results, the current valuation is somewhat elevated relative to historical levels.

NOTE: The effect of the TCJA was to reduce the top corporate income tax rate from 35% to 21% thus bringing the US rate below the average for most other Organisation for Economic Co-operation and Development (OECD) countries. It also eliminated the graduated corporate rate schedule.

Given this, it is all the more crucial that investors acquire Walmart shares when the valuation is sufficiently attractive that there is a reasonable probability of generating an attractive ROI.

Walmart – A Dividend Aristocrat – Final Thoughts

Walmart’s dividend is consistent and safe otherwise it would not be a Dividend Aristocrat that is likely to become a Dividend King in 2 years. This, however, is not a sufficient reason to invest in Walmart. Investors should look at the potential overall return from an investment. If we overpay for Walmart’s shares we increase the probability of generating a sub-par return.

In my opinion, Walmart’s valuation is unattractive so I am not adding to my position in any of the accounts in which I hold shares. Based on the information currently available, I view a share price under the mid $130s as a level at which I would consider acquiring additional shares.

Having said this, a drop in Walmart’s share price alone is no reason to acquire shares. I would need to revisit Walmart’s outlook and valuation. A decision to add to my Walmart position would also depend on other investment opportunities that present themselves when Walmart’s target price is achieved.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom.

Thanks for reading Walmart (WMT) – A Dividend Aristocrat.

Please read Church & Dwight (CHD) – A Dividend Aristocrat or Emerson Electric – A Repositioned Dividend King if you are interested in reading another article by Charles Fournier.

Disclosure: I am long WMT.

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Author Disclosure: I disclose holdings held in the FFJ Portfolio and the dividend income generated from these holdings. I do not disclose details of holdings held in various tax-advantaged accounts for confidentiality reasons.

Author Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.

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