Brick-and-mortar retailers have been under attack by online competition. And Wal-Mart (NYSE: WMT), one of the largest and oldest big-box retailers, has not been immune.

When you add stagnant sales growth, rising labor costs and shrinking, paper-thin margins to the equation, it looks like the recipe for a dividend disaster.

[ad#Google Adsense 336×280-IA]Investors have noticed. Last year, shares of Wal-Mart fell from $90 per share to less than $57 in November.

But with Wal-Mart off its lows and now trading north of $70, things may be turning around.

Convenience Is King

After all, Wal-Mart sells virtually every consumer good you can think of. And its locations are convenient.

You can find at least a handful of stores in every single state across the U.S. In some states, you can find hundreds of them.

Yet when I lived in New York City, a friend once asked me what, if anything, I missed about living in the suburbs. My answer surprised her.

It wasn’t the grass or the trees. I could go to Central Park if I was missing nature. It was not silence I longed for or the freedom of driving a car.

Even though I lived in a city where I could have almost anything I wanted delivered to me, what I missed most was shopping at Wal-Mart.

That’s because I was accustomed to the ease of shopping for everything I needed – and even the novelty of shopping for things I didn’t really need – all under one roof.

Can Cash Flow Keep Up?

Investors have grown accustomed to Wal-Mart’s reliability, too. And by that I mean its 43 consecutive years of steady dividend increases. There aren’t many companies with dividend track records that can match Wal-Mart’s.

But, as Safety Net followers know, a stellar track record means nothing if a company doesn’t have the free cash flow to continue feeding the dividend today.

For example, during the last fiscal year, Wal-Mart generated $15.9 billion in free cash flow. But this was a 2.92% drop from the $16.4 billion it generated the previous year. It still paid out $6.3 billion in dividends, but those figures bring Wal-Mart’s payout ratio to 39.56% – well below the Safety Net’s 75% comfort cap.

Unfortunately, Wal-Mart’s free cash flow is expected to decline again this year… this time by 19.32% to $12.8 billion. With the more than $6.3 billion it is expected to pay out to shareholders in dividends during the upcoming fiscal year, Wal-Mart’s payout ratio will rise to 49.19%.

Weighing the Variables

The Safety Net formula frowns on two years of declining free cash flow. But with Wal-Mart’s strong dividend history, it would likely discount one of them.

Plus, even the $12.8 billion in free cash flow expected this year is higher than the $12.7 billion it produced three years ago. So that would work in its favor too.

While most shoppers either love or hate Wal-Mart, its dividend safety isn’t very controversial.

There’s something to be said for being able to get my groceries, my gardening supplies and my nephew’s birthday present all from one place.

And there’s something to be said for Wal-Mart’s safe dividend as well: It has a low risk of being cut.

Dividend Safety Rating: B

Good investing,

Kristin

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Source: Wealthy Retirement