Every company has one number that defines its fiscal health more than any other. For Wal-Mart (NYSE:WMT), the world's largest retailer, that number is 1.6%.
This figure represents the year-over-year revenue growth rate in Wal-Mart's latest fiscal year. The number has not changed much over the past four quarters, and when we look back at Wal-Mart's history, it's clear the company is reaching the terminal limits of its worldwide growth:
Wal-Mart's U.S. same-store sales grew by a mere 0.5% in its most recent quarter after enduring seven consecutive quarters of declines. International sales rose just 1.7% year over year in that same quarter, and Wal-Mart now plans to shutter dozens of underperforming foreign locations. This wouldn't be so bad if the company could offset weaker sales with improved profitability, but Wal-Mart's trailing 12-month margins -- in terms of both operating and net profit -- have instead sunk to decade lows this year:
A recent analysis by Trefis highlighted two reasons for this slide: Wal-Mart's increased focus on the notoriously low-margin grocery business, coupled with rising labor costs at the company's Chinese suppliers, which make up roughly 80% of the company's vendors. Neither of these problems are likely to go away, as Wal-Mart is effectively the world's largest grocer -- it earns more than half of its revenue from grocery sales -- and the Chinese minimum wage is mandated to increase every two years.
These problems can be clearly seen when comparing Wal-Mart's top and bottom lines over the past 10 years and over the past five. The company has repurchased nearly a quarter of its shares since late 2004, which pushed earnings per share far ahead of both its revenue growth and its share price:
The same has not held true since the end of the financial crisis. While Wal-Mart's EPS has surpassed its revenue since 2010, the share price has grown even faster:
This is in large part simply the byproduct of a search for safe yield in a zero-interest rate environment -- no one gets fired for buying the stock of the world's largest retailer when that stock pays out 2.3% a year -- but as growth slows, Wal-Mart's leadership has plowed more and more of its cash flow back to shareholders via dividends and buybacks. Fool consumer goods specialist Jamal Carnette has noted that Wal-Mart's payouts (dividends and buybacks) were 55% of the retailer's operating cash flow in its last fiscal year, up from 47% two years earlier.
Since Wal-Mart's operating cash flow is not improving (it is lower on a trailing 12-month basis today than it was in Wal-Mart's 2010 fiscal year), its increased commitment to paying back shareholders certainly appears to signal a company that has grown all it can. There's nothing inherently wrong with this practice, but investors in search of more than a steady payout might be better served elsewhere, especially since Wal-Mart has not bested the S&P 500's total return over the past five years:
Wal-Mart isn't going anywhere, but it's not exactly growing anywhere, either, as the uptick on its top line is now barely keeping pace with inflation. Being "the world's largest" doesn't always mean a company has grown as far as it can, but it certainly seems to be true for Wal-Mart today. Investors should be aware of this slowdown before they start to expect more than steady payouts and modest buyback-driven growth.
Alex Planes holds no financial position in any company mentioned here. Follow him on Twitter @TMFBiggles or connect with him on LinkedIn for more insight into investing, markets, economic history, and cutting-edge technology.
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