Finance: Think Long, Think Global
October 29, 2007-- Home Textiles Today,
Bentonville, Ark. — Facing tough questions in the opening hour of its annual analyst and investor confab last week, Wal-Mart insisted its financial policy of boosting share buybacks and dividends while cutting domestic capital expenditures — but expanding internationally — will yield benefits both to short-term investors and those in for the long haul.
And Wal-Mart does mean long. In response to questions about the increased investment in its Japanese joint venture, president and ceo Lee Scott noted, “Our board has an obligation to think, not just five years out, but 10 or 15 years from now.”
Wal-Mart has been generating robust free cash flow, and last year paid out $2.8 billion in dividends plus another $1.4 billion in repurchasing shares. This year (fiscal 2008) there is far more largesse, as the $345 billion retailer plans a total of $3.6 billion in dividends and has already made $5 billion in share buybacks.
Still, Wal-Mart's share price peaked above $50 at mid-year but traded below $44 the first day of the meeting — a bit above its five-year low when it dipped near $42 in September. The price hasn't popped above $55 per share since 2004.
Tom Schoewe, evp and cfo, outlined more of the plan: Wal-Mart will continue to slow its capital expenditures through fiscal year 2009 and 2010, from $15.7 billion last year to between $13.6 billion and $15.0 billion in 2010.
Return on investment, meanwhile, which has declined from 19.9% to about 19.3% this year, is planned to flatten.
Analysts continue to rail about high-risk investments internationally, but Schoewe said the opportunities are great enough to warrant the moves. Schoewe said he agreed the company has been “pressing hard” but said international decisions go through the “same filters” as decisions like U.S. store remodels or Sam's Club initiatives.
Wal-Mart wants another Canada, another Mexico. The decisions to invest heavily there in the mid-1990s were roundly criticized by Wall Street at the time. Today, Wal-Mart rules retail in both those countries, is quite profitable there and is positioned for further gains. Analysts, however, point to retreats from Germany and South Korea as examples of a Wal-Mart “bridge too far” that they would wish to avoid in Japan, India or elsewhere.
When asked about the saturated domestic outlook after two years of remodels, special projects and merchandising trade-up attempts, ceo U.S. Stores Eduardo Castro-Wright acknowledged that “higher margin businesses are not performing as well as hoped.”