What We Can Learn From How Wal-Mart Uses Its Cash

One final thought drawn Shahien Nasiripour's 4,000 word HuffPo opus on the Fed. Nasiripour points out that the Fed's mandate is "maximum employment, stable prices, and moderate long-term interest rates."

Walmart Stores
Source: Walmart
Walmart Stores

So how are we doing on the employment front? According Nasiripour, not so well.

He makes the case about Wal-Mart's capital structure and investment decisions:

"Walmart, for example, spent $9.1 billion on capital expenditures in the 2008 fiscal year, the company said in an Oct. 13 presentation for investors and analysts. That dropped to $5.8 billion in 2009, and $6.6 billion in 2010."

"In 2006, 71 percent of the company's cash went to capital expenditures and acquisitions, while 29 percent went towards share repurchases and dividends, Walmart noted in a separate Oct. 13 presentation. That's now flipped."

"Over the last 12 months, 43 percent of the firm's cash has gone towards building the company and hiring more workers. Fifty-seven percent went to shareholders."

Unfortunately, Nasiripour doesn't speculate about the causes of such investment activity in companies like Wal-Mart.

(After all, if it were economically advantageous for Wal-Mart to invest the majority of its cash in expanding its stores and hiring new workers, why on earth wouldn't it do so? Clearly, there are reasons.)

The counter argument, it seems, is fairly straightforward: What do you expect these companies to do?

Consumer demand is weak. If sales are sagging, it's highly likely that the company has excess capacity for production as it is. Additional CAPEX would patently defy logic—and not benefit the shareholders of the company in the slightest: The company, after all, does belong to them.

Moreover, if I were a shareholder — with a potential tax hike looming on the horizon — I would have a pretty serious bias in favor of cash being returned to me sooner rather than later. If senior management of the company sincerely believes that the potential to generate cash flow from ongoing operations is poor, this reasoning would seem to be even more sound.

Especially now: The truth is that whether it is a reality or merely a perception, the business community has serious reservations about the current administration's commitment to future pro-growth, pro-business policies.


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