Wal-Mart Stores, Inc. (NYSE: WMT) had a bit of unusual debt rating coverage this morning after Fitch reiterated Wal-Mart’s “AA” rating and said its outlook is stable.  The reason for the note was a $5 billion bond issuance that Wal-Mart is selling to repay commercial paper and for general corporate purposes.

There was not really any great insight in Wal-Mart, but what matters is what Wal-Mart COULD do with its offering.  Fitch cited a dominant position in North America and a strong position in the United Kingdom, followed by a growing presence in China, Brazil, and elsewhere.  Fitch further noted that it has a steady financial profile despite the company’s share buybacks being financed by debt.  The challenging economic environment was noted with weaker top-line sales growth.

If this works, maybe Wal-Mart can figure out how to put a different sort of pressure on competitors by making a dividend yield that is just too high for its peers toever be able to compete with.  Wal-Mart has retired shares via buybacks for some time, yet this may not be the best deployment of capital.  Wal-Mart pays an annualized dividend that yields close to 2.3% right now.  That is higher than most retail store outlets believe it or not and it is a high among direct peers.

Imagine if Wal-Mart raised its dividend significantly higher by simply hiking the payout much more rather than by buying down its share count.  The current payout is $1.21 or about 2.3% per share.

Wall Street is taking this as a net-positive.  Wal-Mart shares are up nearly 1% at $53.87.  Thomson Reuters expects this year’s earnings to be $4.01 EPS and next year’s to be $4.40.  If Wal-Mart decided to use a 40% model of dividends to income, that dividend would be roughly $1.60 and that would give it a yield today of just under 3%.

Sure, there are other considerations other than just earnings per share estimates.  That is still where the basis starts, and this would make Wal-Mart stand out as the direct leader there for income investors who want a great American franchise.  This would also make the stock roughly #13 or #14 in dividend yields of the 30 DJIA components.  As it stands today, that yield ranking has Wal-Mart at roughly #20 depending upon the daily moves against others with yields around 2.3%.

As far as the bond yields and the pricing, we have not yet seen a formal pricing.  The chatter is that these may challenge some of the record lowest yields seen on corporate bonds for its short-dated maturity tranches.

JON C. OGG

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