Wal-Mart Stores (NYSE:WMT) is under pressure from a variety of headwinds, including the lack of economic recovery for its core demographic, to an eroding public image for its employment practices. Customers have voted with their feet, and increasingly spent their shopping dollars at competitors. This has affected Wal-Mart's financial performance for the past year and a half, and its earnings results showed little to no growth. Of course, Wal-Mart's dividend was soon affected as well. Even though the stock is well-regarded as a top dividend stock after having increased its dividend for an impressive 41 years in a row, Wal-Mart delivered a disappointing dividend raise earlier this year of 2%.
However, Wal-Mart's most recent earnings report showed meaningful signs of progress, thanks to key strategic initiatives that are beginning to work. Here's why there seem to be better days on the horizon for Wal-Mart and its dividend.
Glimmers of hope
For the past year, Wal-Mart struggled to produce growth. Its huge super-centers that were located primarily in rural areas seemed to have reached their inevitable limit for growth. This was further complicated by the fact that Wal-Mart had long flailed in its attempts to expand into urban areas.
Fortunately, Wal-Mart gave up the quest to build its supercenters in urban areas, which was unrealistic because large cities can't offer the square footage necessary to build these huge stores. Each Walmart Supercenter is about 182,000 square feet and employees about 300 associates. That's where Wal-Mart's newer concepts, the smaller-store format under the Neighborhood Market (roughly 38,000 square feet) and Express (roughly 12,000 square feet) banners, are working to save the company. (The Express stores were recently rebranded under the Neighborhood Market banner and that category now has 431 stores in the United States.)
Importantly, Wal-Mart grew same-store sales in the United States last quarter, and the smaller stores did most of the work. Same-store sales measure revenue at locations open at least one year. Wal-Mart produced a 0.5% increase in domestic same-store sales year over year, which might not sound like much, but it reversed a six-quarter streak of flat or falling comparable sales. This was due largely to the Neighborhood Market concept, which increased same-store sales by 5.5% in the United States.
Another area in which Wal-Mart was late to the party is e-commerce. Retailers are increasingly generating more of their sales from online, but Wal-Mart's Internet business was a non-factor until recently. Fortunately, Wal-Mart has gotten its act together in the realm of online sales. Global e-commerce sales soared 21% last quarter. Growth in e-commerce boosted Wal-Mart's total U.S. sales by 20 basis points last quarter.
While Wal-Mart's famous Supercenters still account for most of its business, the meaningful progress of its small-store locations and online sales show that Wal-Mart is no longer a lumbering giant. Instead, it's using its size and scale to capitalize on new opportunities, to prove that it is every bit as innovative and nimble as its smaller competitors.
Back to the dividend
Wal-Mart's management has taken a conservative approach to the dividend over the past year as sales growth has slowed significantly. Wal-Mart's last dividend increase was in the amount of just one penny per share quarterly, or 2%. That fell well below the company's average rate of dividend growth over the past several years. For example, prior to 2014, Wal-Mart's five-year dividend growth stood at 14.5% compounded annually.
Still, there's hope for better dividend growth. Wal-Mart's payout ratio, which analyzes how much of a company's profits are distributed to investors as a dividend, is a very modest 38% of this year's expected earnings. If Wal-Mart returns to growth in the U.S., it's likely its future earnings will improve, which provides even more room for higher dividend raises.
Wal-Mart's dividend yield of 2.3% at recent closing prices is higher than the average yield of the stock market as a whole. Investors buying in at these levels get both a decent current yield, as well as the potential for high dividend growth. Wal-Mart has all the makings of a good dividend stock to buy now.