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Avoid These Two Giants, But Buy Wal-Mart Stores, Inc. (WMT)

Along with decreasing revenue, its earnings are also decreasing. Still, the company has sustained its quarterly dividends. As a result, its payout ratio based on dividends is increasing year-over-year. In the trailing twelve months, its payout ratio stands at 364%. This means that Windstream’s earnings are not providing enough cover to its dividend payments.

Furthermore, its free cash flows do not provide cover to its dividend payments either. In this situation, I feel it is difficult for the company to sustain its dividends over the next few quarters until they have enhanced their revenue base as well as margins.

Wal-Mart Stores, Inc. (NYSE:WMT) dividend profile

Wal-Mart Stores, Inc. (NYSE:WMT) operates in three business segments: Walmart International, Walmart U.S, and Sam’s Club. Over the years, Wal-Mart has consistently increased its dividends. Over the past five years, it has been able to enlarge its dividends by 97.89%. At present, the company offers a quarterly dividend of $0.47 cents per share.

How the dividends are safe

Wal-Mart Stores, Inc. (NYSE:WMT) is one of the best businesses in the U. S., and by most measurements it has been a great long-term investment. Below are a few key metrics that demonstrate its long term profitability:

  • Debt/Equity ratio 0.5
  • Earnings-per-Share for the past five years 9.69%
  • Earnings-per-Share for the next five years 9.29%
  • Payout ratio 31.7

Wal-Mart Stores, Inc. (NYSE:WMT) has shown solid financial performance over the years. Its top line growth is solid. It has been able to enlarge revenue on average by 4.8% in the past three years while the industry average stands at -0.7. Additionally, it has solid margins on sales. At the end of the recent quarter when sales increased by only 1%, it was still able to enlarge its earnings-per-share by 4.6%.

Along with solid profitability, its earnings provide full cover for its dividends. In the trailing twelve months its payout ratio stands at 31.7%, providing a lot of room to increase its dividends. Furthermore, its free cash flows are also enough to pay dividends. At the end of the recent quarter, its free cash flows stood at $12.67 billion while dividend payments accounted for only $5.3 billion. On the negative side, it has increasing competition from Amazon.com, Inc. (NASDAQ:AMZN) and Costco Wholesale Corporation (NASDAQ:COST). Both companies have lower fixed asset bases and operate at much lower profit margins.

Final notes

CenturyLink is experiencing difficulties in its top line growth. The company is making smart moves and investing heavily in growth opportunities, however. All the same, I think the company’s financial situation is not healthy for dividend investors at the moment. Windstream has sustained consistent dividends over the past four years, but at the same time its profitability is decreasing which has pushed its payout ratio up to 360% at present. I think the company will have to enhance its revenue base and margins to sustain its dividends. In the case of Wal-Mart Stores, Inc. (NYSE:WMT), it is a solid investment for the long haul.

The article Avoid these Two Giants, but Buy Wal-Mart originally appeared on Fool.com.

siraj sarwar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. siraj is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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