Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Wal-Mart suffered its first-ever annual sales decline last year, marking the end of a decades-long era of growth. Now the retailer faces another worrisome change: exile from dividend royalty.

The aggregate amount of cash Wal-Mart paid out in the form of dividends to its shareholders fell by 1.1 percent in the second quarter from a year ago, marking only the third such year-over-year drop in its history. (It also occurred in the first quarter of this year and the first quarter of 2014). 

Penny Wise
Walmart has raised its dividend payout each year for 43 years, but increases have slowed dramatically
Source: Bloomberg

This matters because the retailer has long been a member of the "dividend aristocrats," companies in the S&P 500 index that have increased dividends every year for 25 consecutive years. These 50 or so companies, including McDonald's and AT&T, are a magnet for long-term, income-minded investors drawn to steady cash flow.

And with bond yields at record lows, investors are placing an even higher premium on dividend-delivering corporate stocks. Any sign these companies might not increase their dividends could be a signal to shareholders and competitors of a cash-flow problem, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. 

Wal-Mart executives like to brag the company has increased its dividend for 43 straight years -- and doesn't intend to stop.  While that's true, lately it looks like Wal-Mart has been doing the bare minimum to cling to the aristocracy.

After years of steep increases, Wal-Mart boosted its quarterly dividend payout by just one additional penny in each of the past three years. That came out to a four-cent increase last year, bringing its annual dividend to $2 a share. In aggregate, Wal-Mart's total payout has shrunk, as it has fewer shares on which to pay dividends -- it has spent billions of dollars buying back stock in recent years, reducing its share count by 18 percent since 2010. 

Unyielding
Walmart's dividend yield remains higher than the overall market
Source: Bloomberg

Of course, when it comes to investing, everything is relative. Wal-Mart's dividend yield of 2.7 percent still beats the S&P 500's 2.1 percent yield. That metric, though, is calculated by dividing the annual dividend per share by the price, and Wal-Mart's shares fell by 30 percent in 2015. Its shares have fared much better lately, gaining 18 percent so far this year. 

Keeping Up
Walmart's shares are up 18% so far in 2016, after being battered in 2015
Source: Bloomberg

And when investors seeking safety consider the record-low yields of U.S. Treasury debt -- the 10-year note yield is hovering around 1.5 percent -- anything more than that from a U.S. corporate stalwart like Wal-Mart looks pretty good. 

It's All Relative
Walmart's dividend yield looks good when compared to U.S. government bonds
Source: Bloomberg

Other big companies are catching on that they don't have to break the bank to attract investors: The average dividend increase among S&P 500 companies that raised dividends so far this year is 10 percent, down from 17.5 percent in 2014 and 26 percent in 2011, when companies that may have suspended dividends during the recession revved them up again, according to S&P's Silverblatt. 

As long as Wal-Mart keeps raising its dividends, it doesn't really need to dole out more to stay competitive.

Either way, Wal-Mart slowing its dividend growth isn't necessarily a bad thing. It leaves more of the company's $10 billion in free cash flow for building its business for the long term, with investments such as its recently announced $3.3 billion acquisition of e-commerce upstart Jet.com. That could improve Wal-Mart's chances of keeping up with changing consumer trends. After all, aristocracy tends to get in trouble when it ignores the masses. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net