Skip to main content
yield hog

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

With dividend yields, bigger isn't necessarily better. Case in point: Wal-Mart Stores Inc.

The world's biggest retailer has never yielded more than 2.8 per cent (the yield is currently about 2.5 per cent). Yet, investors who gave the stock a pass based on yield alone would have missed out on some phenomenal dividend increases.

For the 20 years ended Sept. 30, Wal-Mart's annualized total return, including dividends, was 10.7 per cent. Over that time, the dividend has grown nearly 30-fold, and more increases are almost certainly on the way as Wal-Mart's sales and earnings continue to climb.

"The company has been able to grow sales, earnings per share and dividends … in good economies and bad," Edward Jones analyst Brian Yarbrough said in a recent note. "It is this type of long-term consistency that sets Wal-Mart apart from most of its competitors."

It's also a reason I own the stock personally and – despite Wal-Mart's recent challenges – I intend to hold it for the increasing income.

Last February, Wal-Mart hiked its dividend 18 per cent, to $1.88 (U.S.) a share annually from $1.59 – one of the largest increases in the company's history. Barring some sort of global catastrophe, the company will raise its dividend again this February, marking the 40th consecutive increase since its first dividend was declared in 1974.

By virtue of its scale – revenue last year topped $469-billion – Wal-Mart enjoys a huge cost advantage over other retailers, allowing it to undercut competitors on a range of items. Having dominated the general merchandise category for decades, Wal-Mart has recently applied the same buying clout and inventory management expertise to groceries to become the largest U.S. food retailer. Over the past five years, its market share in food has climbed to 18 per cent from 13 per cent, Mr. Yarbrough said.

Over all, Wal-Mart is poised to increase sales about 6 per cent annually for the next several years through a combination of sales growth in existing locations, new-store openings and international expansion, he said. That should translate into expected earnings per share growth of about 9 per cent, helped by share repurchases and improving international margins.

Despite the company's strengths, the shares – which closed Tuesday at $74.37 – are trading at a modest valuation of about 13 times next year's estimated earnings. While not exactly bargain-basement levels, the multiple is reasonable for a company with a bulletproof balance sheet, strong free cash flow generation and plenty of growth potential in emerging markets.

To be sure, Wal-Mart has had its share of struggles, particularly in the U.S. market where consumers have been hampered by high fuel prices, persistent unemployment and rising taxes. In August, the company posted an unexpected decline in U.S. same-store sales and cut its full-year sales and profit forecast.

Compounding Wal-Mart's woes, the U.S. government shutdown has left hundreds of thousands of federal employees without paycheques and countless others reluctant to shop just as the holiday season is approaching.

"When all people hear about on the news is the stalled economy and the debt ceiling, that's not helpful," Bill Simon, head of Wal-Mart's U.S. operations, said at the company's annual meeting with investors and analysts on Tuesday. "We're battling through that – and it is a constant battle."

The company is fighting back with a range of initiatives. Mr. Simon said. Wal-Mart plans to use some of its large U.S. supercentres as distribution hubs to serve nearby smaller stores. The move, which is in the test phase and and will be rolled out to three markets next year, is intended to trim costs and help to keep merchandise in stock. In a bid to reach more urban consumers, Wal-Mart has been opening Neighbourhood Market and Wal-Mart Express stores, which are a fraction of the size of supercentres.

At the same time, the company is aiming to drive more traffic through existing locations in a bid to get same-store sales growing on a sustained basis.

"When you go to our stores, you're going to see fantastic new merchandise, aggressive investments in price through lots of rollbacks and better in-stock levels. We're focusing on execution to deliver results," Wal-Mart chief executive Mike Duke said at the meeting.

Wal-Mart will have its ups and downs, as the economy, the weather, gas prices and the fickle tastes of consumers all affect its sales and bottom line. Its stock price will also bounce around with its quarterly results. But given the company's track record of dividend increases, investors who shop for Wal-Mart shares will be rewarded with rising income for many years to come.