Walmart (WMT) is one of the largest (if not the largest) supermarket chains in the world. With a clear focus on the USA, the company’s financial results usually also are a pretty good indication of how the US economy (and the spending pattern) is doing.


Walmart1 
Source: stockcharts.com

One of the largest companies in the world, but how was FY 2017?

After a small decline in FY 2016, Walmart’s revenue picked up again in FY 2017 (which ended on January 31st, 2017), to $486B. This immediately emphasizes the size of Walmart, as the company is generating in excess of $1.3B in revenue per calendar day.

Unfortunately the pressure on the company’s margins is extremely clear when you see the operating income. The total revenue in FY 2017 is pretty much exactly the same as in 2015, but the operating income has fallen by a stunning 16%. Whereas the operating margin in 2015 was 5.59%, this fell to 4.69%. This emphasizes that generating lots of revenue doesn’t always mean you’re performing well on the financial front.
Walmart2 
Source: annual report

The net interest and capital lease payments decreased and due to the lower tax bill, the net income fell by 7% compared to the previous financial year. Fortunately the EPS fell by ‘just’ 4% due to Walmart’s continuous focus to buy back stock. The bottom line? An EPS of $4.40 in FY 2017, compared to $4.58 in 2016 and $5.07 in 2015. The trend is definitely downward.

But what about the cash flows? Perhaps the lower net income is purely an accounting thing?

The total operating cash flow in FY 2017 was $31.53B, and after taking the deferred taxes and changes in its working capital position into consideration, the adjusted operating cash flow was approximately $24.6B, down 4% from the $25.9B in the previous financial year. However, Walmart’s capex spending is clearly on a downward trajectory as well. Whereas the company spent $12.2B in 2015, $11.5B in 2016, the total capex bill came in at just $10.6B in FY 2016, resulting in a free cash flow of $14B, which is actually pretty much in line with last year’s result.


Walmart3 Source: annual report

Is this a reason to be happy? It depends. It’s certainly interesting to see how Walmart was able to reduce its annual capex by $1.5B in just two years, but it might make you wonder whether or not the company might be under-investing in its assets. Only time will tell, and we will know more in the next few months.

How is Walmart spending its cash?

For 2018, Walmart is guiding for an EPS of $4.2 to $4.40 (which would once again be a decrease), so for now, let’s assume the adjusted free cash flow remains unchanged (as a lower accounting profit doesn’t necessarily mean the cash flows will be impacted as well.

Of the $14B in adjusted free cash flow in FY 2017, Walmart’s dividend costed the company approximately $6.2B. That’s very reasonable, as the total cash outflow is just 0.3% higher compared to FY 2015, even though Walmart’s quarterly dividend has been increased from $0.48 to $0.51.
Walmart4 
Source: Ycharts.com

This could easily be explained by the company’s extremely aggressive share repurchase program. In fact, in FY 2017, Walmart has spent more on share buybacks than in the two previous financial years COMBINED. This effort is paying off though, as Walmart repurchased almost 120 million shares at an average price of $69.18 (versus 62.4 million shares at almost $66 in the previous financial year).

The total share count right now is approximately 3.033B and applying the $14B in adjusted free cash flow on this number results in a FCF/share of $4.61. So at an average share buyback price of $69.18, Walmart was actually buying back stock at a free cash flow yield of 6.7%. Although the company was overspending on shareholder rewards (the dividend + share buybacks were higher than the adjusted free cash flow), it was a good move from the management to buy back stock whilst it was relatively cheap.

Investment thesis

At the current share price of approximately $73, it will be more expensive for the company to buy back its own stock, but as long as the FCF yield remains above 6%, it makes total sense to do so. Not only will this reduce the impact of the lower profits and free cash flows (on a per share basis), it also allows the company to keep the cash outflow related to the dividend stable. If you buy back 3% of your stock per year, you can increase your dividend per share by 3% without having to pay a single dollar more.

It might also be interesting to try to write some put options on Walmart, as the premiums are quite attractive. For instance, the P70 expiring in September for an option premium of $2 looks pretty interesting. The FCF yield would then come in at approximately 6.6% (based on the $70 and excluding your option premium).

Disclosure: the author has no position in Walmart

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