Lex: Wal-Mart

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Wal-Mart has had a difficult time on the media front lately. But while the social costs of its success are the stuff of controversy, putting a financial price tag on it is becoming easier. Or so conventional wisdom among Wall Street analysts has it. Despite the spike of the past few weeks, the shares are now trading at just 16.5 times earnings for the next fiscal year, hardly outrageous by sector standards.

On the face of it, the world’s largest retailer has grown into its valuation. It may still lack a catalyst, obviously remains exposed to the pinch on consumer budgets from oil prices and will need to catch up with faster-growing rivals such as Target in lucrative clothing. But, the bulls argue, its risk/reward profile is starting to look tempting.

As long-term investment advice, this ranks on a par with “the more you buy, the more you save”. Wal-Mart’s market capitalisation is $206bn. Last year, it generated net cash flow of $2.7bn after investments, while cash provided by operating activities fell. This year’s dividend, which costs $2.2bn, yields just over 1.2 per cent. The bulk of its share buy-backs have lately been debt-financed.

On pretty generous assumptions, Wal-Mart would need to grow dividends by 10 per cent for another 30 years – and pay out $100bn a year afterwards to justify its current share price. That looks unlikely, if recent same-store growth rates and the fact that indebted US consumers will eventually need to rebuild their balance sheets are any guide.

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