Question

Topics and Key Questions - Walmart Company

I. Corporate Governance Analysis

Is this a company where there is a separation between management and ownership? If so, how responsive is management to stockholders?

How does this firm interact with financial markets? How do markets get information on the firm?

How does this firm view its social obligations and manage its image in society?

II. Stockholder Analysis

Who is the average investor in this stock? (Individual or pension fund, taxable or taxexempt, small or large, domestic or foreign)

Who is the marginal investor in this stock?

III. Risk and Return

What is the risk profile of your company? (How much overall risk is there in this firm? Where is this risk coming from (market, firm, industry or currency)?

How is the risk profile changing?)

What is the performance profile of an investment in this company?

What return would you have earned investing in this company's stock?

Would you have under or out performed the market?

How much of the performance can be attributed to management?

How risky is this company's equity? Why? What is its cost of equity?

How risky is this company's debt? What is its cost of debt?

What is this company's current cost of capital?

IV. Measuring Investment Returns

Is there a typical project for this firm? If yes, what would it look like in terms of life (long term or short term), investment needs and cash flow patterns?

How good are the projects that the company has on its books currently?

Are the projects in the future likely to look like the projects in the past? Why or why not?

V. Capital Structure Choices

What are the different kinds or types of financing that this company has used to raise funds?

Where do they fall in the continuum between debt and equity?

How large, in qualitative or quantitative terms, are the advantages to this company from using debt? How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt?

From the qualitative trade off, does this firm look like it has too much or too little debt?

VI. Optimal Capital Structure

Based upon the cost of capital approach, what is the optimal debt ratio for your firm?

Bringing in reasonable constraints into the decision process, what would your recommended debt ratio be for this firm?

Does your firm have too much or too little debt relative to the sector?

Does your firm have too much or too little debt relative to the market?

VII. Mechanics of Moving to the Optimal

If your firm's actual debt ratio is different from its “recommended" debt ratio, how should they get from the actual to the optimal?

In particular, should they do it gradually over time or should they do it right now? Should they alter their existing mix (by buying back stock or retiring debt) or should they take new projects with debt or equity?

What type of financing should this firm use? In particular, should it be short term or long term? What currency should it be in? What special features should the financing have?

VIII. Dividend Policy

How has this company returned cash to its owners? Has it paid dividends, bought back stock or spun off assets? Given this firm's characteristics today, how would you recommend that they return cash to stockholders (assuming that they have excess cash)?

IX. A Framework for Analyzing Dividends

How much could this firm have returned to its stockholders over the last few years? How much did it actually return?

Given this dividend policy and the current cash balance of this firm, would you push the firm to change its dividend policy (return more or less cash to its owners)?

How does this firm's dividend policy compare to those of its peer group and to the rest of the market?

X. Valuation

What type of cash flow (dividends, FCFE or FCFF) would you choose to discount for this firm?

What growth pattern (Stable, 2-stage, 3-stage) would you pick for this firm? How long will high growth last? What is your estimate of value of equity in this firm?

How does this compare to the market value?

What is the "key variable" (risk, growth, leverage, profit margins...) driving this value? If you were hired to enhance value at this firm, what would be the path you would choose?

Answer 1

Corporate Governance Analysis

Yes, at Walmart there is a clear distinction between the management and owners. The Board has 5 primary standing committees, including the Nominating and Governance Committee, which reviews and advises management on Walmart’s ESG initiatives. In FY2019, the Nominating and Governance Committee met five times.

The management is quite responsive to the stockholders and the Board generally engages with its owners in the following ways:

1. Shareholder outreach programs: to discuss corporate governance matters, executive compensation and other strategic matters.

2. Walmart resources: website, helpline numbers etc

3. Formal communications: SEC filings, investment community meetings, quarterly earnings material.

Walmart engages with the financial markets in the form of its annual report consisting of financial statements viz P/L, Balance Sheet, Cash Flow Statement, interim/quarterly review statements etc.

Markets get information about the firm via annual financial statements, press conferences, interviews with MDs, CEO, CFO or any other executive personnel of the Firm, yearly reviews of the Firm which might impact the share prices.

Social Obligations at Walmart:

Walmart has engaged with several advisory councils to offer critical input on Walmart’s business and ESG practices and initiatives. These include the Living Green Working Group, which comprises representatives of NGOs looking after environmental concerns, and the Workforce Advisory Council, which is made up of experts in workforce development. Working with third-party advisory councils enables Walmart to benefit from an array of expertise and opinions and helps them shape their business startegies.