ARTICLE:

What's New? Walmart's Buyback of Its Stock

Sam and Bud Walton founded Walmart in 1962 when they opened their initial store in Rogers, Arkansas. In 1972 shares were listed on the New York Stock Exchange. It took 17 years to reach $1 billion in sales in 1979, six years later it ended 1985 with $8.4 billion in sales and a decade later it had $93.6 billion in sales, and in the year ending January 31, 2012, sales were $445 billion. During the first 30 years it was normal for Walmart to grow at double-digit rates and often over 25 percent per year. When a retailer is growing this quickly it doubles sales approximately every three years. But as a result of that aggressive growth the retailer needs to use all of its profit and often, additional debt to finance its growth.

From 2007 to 2011, Walmart faced a very different situation. By 2007 it had reached daily sales of over $1 billion or $375 billion for the year. However, over the next four years sales had only grown by 18.5 percent to $445 billion. Predictably, that is not terrible since many retailers faltered during this period and faced sales decline. Nonetheless, the longer-term problem is that it is very difficult to grow at a high rate when you are already the world's largest retailer. Consider for instance that in 2011 JCPenney had a bit over $17 billion in annual sales and Walmart grew its total sales by nearly $25 billion. It would be totally unreasonable to expect Walmart to grow at the 25 percent plus historical growth rate during its heyday because that would translate to annual sales gains of over $100 billion or nearly the total sales of six retail chains the size of JCPenney! After-all, Walmart already serves 200 million customers a week from its 9,000 plus stores.

Thus, since 2007, Walmart has been using the large excess cash it is generating to purchase back shares of its common stock. See the exhibit below for more details. In support of this strategy consider the stock price trend over the last decade (see exhibit below). On December 31, 2002, the stock closed at $50.51 and a decade later on December 30, 2011, it closed at $59.76; however, profits had more than doubled from $6.7 billion to $15.7 billion and sales had grown from $218 billion to $445 billion. It is thus not surprising that Walmart has been purchasing back shares of its common stock, that it sees as one of its best investments to increase shareholder value. Note that when a retailer purchases its stock there are fewer shares outstanding and thus making it possible to increase the dividend per share. Incidentally dividend growth has also been very strong since 2002 as show in the exhibit below.

There is no shortage of rumors about what this practice may lead to for the future of Walmart. Some speculate that the company may go private and perhaps return into the hands of the founding family that owned 38 percent of the stock in March 2003 but controlled 48 percent as of March 2011 and may soon control 50 percent of the outstanding stock. This means that Walmart could go private even if other shareholders dissent because the Walton family, through entities they control that hold the shares, could vote to go private. And if they vote to go private and control over 50 percent of the common shares they could avoid having to pay a premium to buy back shares on the open market.

Walmarts Buyback of Its Stock-Read the article.

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