Wal-Mart Stores, Inc. (NYSE: WMT) had a bit of unusual debt rating coverage this morning after Fitch reiterated Wal-Mart’s “AA” rating and said its outlook is stable. The reason for the note was a $5 billion bond issuance that Wal-Mart is selling to repay commercial paper and for general corporate purposes.
There was not really any great insight in Wal-Mart, but what matters is what Wal-Mart COULD do with its offering. Fitch cited a dominant position in North America and a strong position in the United Kingdom, followed by a growing presence in China, Brazil, and elsewhere. Fitch further noted that it has a steady financial profile despite the company’s share buybacks being financed by debt. The challenging economic environment was noted with weaker top-line sales growth.
If this works, maybe Wal-Mart can figure out how to put a different sort of pressure on competitors by making a dividend yield that is just too high for its peers toever be able to compete with. Wal-Mart has retired shares via buybacks for some time, yet this may not be the best deployment of capital. Wal-Mart pays an annualized dividend that yields close to 2.3% right now. That is higher than most retail store outlets believe it or not and it is a high among direct peers.
Imagine if Wal-Mart raised its dividend significantly higher by simply hiking the payout much more rather than by buying down its share count. The current payout is $1.21 or about 2.3% per share.
Wall Street is taking this as a net-positive. Wal-Mart shares are up nearly 1% at $53.87. Thomson Reuters expects this year’s earnings to be $4.01 EPS and next year’s to be $4.40. If Wal-Mart decided to use a 40% model of dividends to income, that dividend would be roughly $1.60 and that would give it a yield today of just under 3%.
Sure, there are other considerations other than just earnings per share estimates. That is still where the basis starts, and this would make Wal-Mart stand out as the direct leader there for income investors who want a great American franchise. This would also make the stock roughly #13 or #14 in dividend yields of the 30 DJIA components. As it stands today, that yield ranking has Wal-Mart at roughly #20 depending upon the daily moves against others with yields around 2.3%.
As far as the bond yields and the pricing, we have not yet seen a formal pricing. The chatter is that these may challenge some of the record lowest yields seen on corporate bonds for its short-dated maturity tranches.
JON C. OGG
