The Walton family's goal of selling about 6 percent of its holdings in Wal-Mart Stores Inc. will take years to accomplish, analysts say.
That timetable, though, is ideal for other shareholders and the company, they added. Walton Enterprises LLC is placing $15.6 billion worth of shares in a trust with the goal of trimming its ownership stake and funding its charitable interests.
"As long as none of the family members wants a fire-sale, and the shares are disposed of in a manner that the company can manage the free cash flow needed to absorb the selling, my first thought was that it is 'manageable,'" said Brian Gilmartin, asset manager of Chicago's Trinity Asset Management.
Wal-Mart announced late last week that the family was interested in dropping its holdings below the more than 50 percent it currently owns.
Family ownership in the company founded by Sam Walton broke the 50 percent ownership threshold as a result of Wal-Mart's stock repurchase program. Wal-Mart authorized a $15 billion stock buyback in 2013, replacing a plan adopted in 2011. According to the company's annual report, about $10.3 billion remains in the current buyback effort, which has no expiration date.
In order for the company to continue buying back stock, the family, through Walton Enterprises LLC, felt obligated to divest a portion of its holdings. Walton Enterprises LLC currently owns 1.42 billion shares, worth more than $100 billion.
"The family believes that this is consistent with an appropriate balance of family and non-family ownership that supports the goals of all Walmart shareholders and long term business success," a statement issued by Wal-Mart reads. "In order to facilitate these sales, the Walton family has informed Walmart that approximately 6 percent of Walmart's outstanding shares are being distributed to a newly formed entity, the Walton Family Holdings Trust."
Repurchase plans are viewed by companies as a way to return value to shareholders without, or in addition to, paying a dividend. Repurchases are viewed as more favorable to shareholders from a tax standpoint.
Buybacks allow companies to increase earnings without increasing revenue because it reduces the number of outstanding shares.
Wal-Mart, which reported $485.7 billion in annual sales, repurchased 13.4 million shares for around $1 billion in 2014. During fiscal year 2014, the company repurchased 89.1 million shares, down from 113.2 million in fiscal year 2013.
Shares of Wal-Mart stock ended Monday trading at $80.29.
"It seems like the Walton family is simply going to sell enough to get their percentage ownership back down to near where it was before Wal-Mart increased the family's percentage ownership by buying back billions of dollars' worth of outstanding stock," said Randy Koontz, first vice president of investments for Pinnacle Wealth Management of Raymond James & Associates Inc. in Rogers. "The real question for Wal-Mart and all companies using cash flow to buy back stock is: Does the fact you view purchasing stock with cash flow a better use of capital than investing in and growing the core business or making acquisitions mean you don't have confidence in the economy and/or the consumer?"
Wal-Mart, according to its annual report, weighs multiple factors when deciding whether to buy back stock. Considerations include "current cash needs, capacity for leverage, cost of borrowings, our results of operations and the market price of our common stock."
Current shareholders might see smaller dividends increase as a result of the buyback, analysts said. Gilmartin said the slow-down in buyback changes the "cash-flow calculus a little." Wal-Mart could be looking to generate more "free cash flow" as adding new stores becomes less important and the company shrinks capital expenditures.
Wal-Mart has paid an annual dividend for 42 consecutive years. It announced in February that the dividend for the current fiscal year would be $1.96 per share.
"As you can see in investing, nothing is ever simple or crystal clear," Gilmartin said.
Business on 04/14/2015