Low-price retailer uses extra cash to boost in-store and online shopping

This big-box retailer is making changes to the way it does business that should benefit shoppers and investors alike.

The U.S. tax reforms have prompted the company to reward its workforce while it also increases spending on online shopping. In the meantime, its sales did better than expected in the latest quarter and the company raised its dividend for the 44th consecutive year.

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WAL-MART STORES INC.  (New York symbol WMT; www.walmart.com) is the world’s biggest retailer, with 11,695 outlets in 28 countries.

In response to the recently-passed U.S. tax reforms, which cut the corporate income tax rate from 35% to 21%, the company plans to increase the starting wage for its U.S. workers to $11.00 an hour. It will also pay a one-time cash bonus of up to $1,000 to many of its workers. In addition, Wal-Mart enhanced other employee benefits such as paid parental leave.

The higher wages and benefits will increase the retailer’s costs in the fiscal year ending January 31, 2019, by $300 million. As well, the one-time bonus payments will total $400 million. To put those amounts in context, the company earned $1.7 billion, or $0.58 a share, in the quarter ended October 31, 2017.

Despite those additional costs, better wages will help Wal-Mart attract and retain employees, particularly as the improving U.S. economy has cut the unemployment rate to just 4.1%.

For the fiscal 2018 third quarter, ended October 31, 2017, earnings fell 42.4%, to $1.7 billion from $3.0 billion a year earlier. Earnings per share declined 40.8%, to $0.58 from $0.96, on fewer shares outstanding.

If you exclude unusual items, such as a loss on the early repayment of debt, Wal-Mart’s earnings per share improved 2.0%, to $1.00 from $0.98. On that basis, the latest earnings beat the consensus estimate of $0.97.

Sales in the quarter gained 4.2%, to $123.2 billion from $118.2 billion. That also beat the consensus forecast of $121.0 billion. If you exclude the impact currency-rate changes had on Wal-Mart’s international operations, sales rose 3.8% in the quarter.

Same-store sales at the company’s U.S. stores improved 2.7% on higher customer traffic (up 1.5%) and selling prices (up 1.2%). Wal-Mart’s heavy spending on its e-commerce businesses is also paying off. In the latest quarter, U.S. online sales jumped 50%. However, e-commerce still represents a small part of the company’s business.

Dividend Stocks: Company strengthens alliance with Chinese online retailer

In 2016 Wal-Mart formed an alliance with Chinese online retailer JD.com (Nasdaq symbol JD). Under the terms of the deal, JD.com acquired Yihaodian—Wal-Mart’s shopping website in China. In exchange, Wal-Mart received a 5% stake in JD.com. It has since increased that stake to 12%.

The two firms recently agreed to strengthen their alliance. That includes better integrating their warehouses and inventory systems in China. That will speed up deliveries. As well, JD.com plans to open specialized shops inside certain Wal-Mart stores that sell home electronic products. JD.com customers will also be able to pick up their online orders at more Wal-Mart stores.

In October 2017 Wal-Mart announced that it would buy back $20 billion of its shares over the next two years. That’s equal to 8% of its $258.8 billion market cap (the total value of all outstanding shares).

Wal-Mart raised its dividend by 2.0% with the April 2017 payment. The new annual rate of $2.04 a share yields 2.0%. It has now increased that yearly rate annually for the past 44 years.

For the last five years the company’s dividend to investors has averaged an annual growth rate of 6.9%.

Wal-Mart now expects to earn between $4.38 and $4.46 a share for all of fiscal 2018. That’s up from its earlier forecast of $4.30 to $4.40 a share. The stock trades at 24.4 times the midpoint of the newer range. That’s a somewhat high multiple, but still reasonable, as steady cash flow from Wal-Mart’s regular stores gives it the resources it needs to build up its online operations.

Recommendation in TSI Dividend Advisor: Wal-Mart is a buy.

For our recent report on a Canadian dividend stock with a strong position in the “contract economy”, read Canadian niche stock fills profitable roles in government and business.

For our views on separating the best dividend stocks from the rest, read The best stocks with dividends share these qualities.



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