Here is something I recently learned while reading Wal-Mart’s financial statements that I thought I would share with you: Over ¾ of Wal-Mart’s inventory gets sold before The Wal-Mart Corporation even has to pay for it. Three-quarters. 75%. Wal-Mart’s profit conversion cycle is one of the most crazily impressive business statistics I have ever seen in my life.
Is it any surprise that the company has grown cash flow per share every year for the past seventeen years, from $0.99 per share in 1996 to $7.50 in 2012?
Is it any surprise that the company has increased earnings per share in each of the past seventeen years, from $0.67 per share in 1996 to $4.93 in 2012?
Is it any surprise that the company raised its annual dividend from $0.11 per share in 1996 to $1.59 today?
(Note: I only reviewed data going to back to 1996—i.e. the starting point of 1996 in these examples isn’t meant to imply that Wal-Mart had a bad year in 1995).
Normally, I never write about retail stores as potential long-term investments because the 20th century is littered with “once invincible” retail companies like A&P, Woolworth, Sears, etc. But it is hard not to be impressed by the infrastructure that Wal-Mart has put in place.
But everything goes up each year like clockwork at the Wal-Mart Corporation. Cash flow. Sales. Earnings. Net profits. Dividends. Up. Up. Up. And the fact that the company has already generated a profit on 75% of its goods before paying vendors the bill for buying the goods is one of the main reasons why Wal-Mart has been taking fantastic care of shareholders for decades. Peter Lynch often said he liked to own low cost producers in his portfolio at The Magellan Fund during the 1980s, and Wal-Mart’s low cost goods combined with the velocity of inventory turnover is proving to be an economic moat in its own right that has prevented competitors from seizing some of the market share of the Bentonville giant.