Which companies come to mind when investors think of safety?
Microsoft ? Wal-Mart ? Exxon Mobil ? Those companies are among the largest and most secure in the world, yet only two carry a AAA credit rating from Standard & Poor's, the highest. Wal-Mart doesn't, even though a paltry 19 per cent of its capital structure comes from debt issues and annual revenue exceeds $400-billion. As companies such as General Electric and Pfizer are dropped from S&P's top level, and Wal-Mart gains market share during the recession, investors should consider buying Wal-Mart bonds and shares.
Wal-Mart's total debt stands at about $40-billion, 41 per cent of which isn't due till 2023 or later. Near-term refinancing needs for the company are nominal, leaving financing costs the only concern. While Wal-Mart's financing expenses are low -- the company has a credit score one notch below the top rating -- its bond yields are well in excess of government issues.
With about $10-billion in free cash flow on revenue of $400-billion, can there be any question about Wal-Mart's ability to repay its commitments? The company continues to expand globally, ensuring its growth, and a decade-plus track record of rising sales and profits leaves little doubt the company can weather any economic condition. Just imagine that the company was founded as Walton's Five and Dime in Arkansas.
The five companies that carry AAA ratings by Standard & Poor's are impressive, but none are any safer than Wal-Mart. The list includes Exxon, Microsoft, Johnson & Johnson, Berkshire Hathaway and Automatic Data Processing.
The U.S. government is the ultimate creditor, of course, and has the pleasure of being the only supposed "risk-free" option in the investing world, meaning it can lend at rates below the most revered company.
Using that power, the government has racked up more than $12-trillion in debt on receipts of just over $2.5-trillion. If you had to pick between lending money to Wal-Mart, with revenue of $400-billion and $40-billion in debt, or the U.S. government, which would you choose? The government prints money, so it can never really run out, unless people refuse to buy its bonds. Wal-Mart is bound only by being able to pay out what it takes in, but is its ability to make money in question? As the largest retailer in the world and a seller of everything from necessities to pricey electronics, it's hard to imagine when money would stop rolling in.
Much of Wal-Mart's success and sustainability has come from its competitive drive, which has put the squeeze on its biggest rivals, such as Target, and its suppliers. As the company grew and focused on operating as efficiently as possible, its supply chain became the new standard. Smooth-as-silk restocking that hardly ever left shelves empty, but also avoided overstocking, allowed the company to avoid tying up much-needed capital in inventory. As new stores sprang up across the country at an amazing rate, it became impossible for Wal-Mart's suppliers to survive without its steady revenue stream.
Wal-Mart used this power position to continually push down prices for inventory, which its dependent suppliers were powerless to stop. Cost reductions enabled Wal-Mart to cut prices well below those of its competitors. (Wal-Mart saves consumers about $300 billion a year, or $2,500 a household, according to Global Insight.) With its entrenched position as the world's biggest retailer, Wal-Mart is able to continue to dictate how its suppliers will operate, which gives Wal-Mart the cost advantage that allows it to remain the world's largest retailer. It's a self-enforcing cycle that shows no signs of breaking anytime soon, especially under Mike Duke, who took over as chief executive officer from Lee Scott in February. Mr. Scott ran the company for the better part of a decade, and Mr. Duke has had a hand in all the company's important business units.
As such, Wal-Mart should be considered the ultimate haven, and the fact that it doesn't boast of a AAA credit rating makes it all the more attractive due to the extra yield.
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