• Lance

For Back-to-School, Don't Just Buy at Walmart: Buy Walmart Bond

It’s Back-to-School time, one of the big retail holidays in America.

That means a lot of parents will be buying school supplies for their kiddies. And with 90% of Americans living within a 15-minute drive of a Walmart store, you can be sure Walmart will be capturing a large number of those dollars from the parents of kindergarteners to college students.

Since, we're talking about back-to-school, for parents whose kids are not yet in college, it's never too early to start saving. Walmart can help there as well.

 

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Walmart has a bond with a 2.7% yield. The Arthur team says that the Walmart bond is perfect for families thinking about college savings and beyond. And it’s probably the only thing that you can’t buy at a Walmart store.

I know what you're saying, "2.7% yield? That's horrible." We'll admit it's not great. In good times, you would like to see 4% or 5%, but these are not good times. We're still in a pandemic economy.

It's not juicy, but in terms of a super-safe bet it can't be beat. And isn't safe what you want when saving for college?

At 2.7%, the Walmart bond pays a yield twice as large as the 1.35% (Sept. 10) paid by the 10-year U.S. Treasury note, the safest bond in the world. It also pays more than the iShares iBoxx $ Investment Grade Corporate Bond ETF (Ticker: LQD), which tracks an index of more than 1,000 stable, high-quality U.S. corporate bonds. After expenses, iBoxx LQD pays an SEC yield of 2.1%, according to Morningstar, 0.6 percentage points lower.

A better comparison is how much are high-yield bonds paying? Remember high-yield is supposed to mean high risk. According to Federal Reserve Economic Data, known as FRED, the ICE Bofa U.S. High Yield Index, the barometer for the high-yield market, spots an effective yield of 4% (Sept. 9) vs. the 11% spike at the beginning of the 2020 lockdown.


That's not a lot of yield for taking on a lot more risk of default than the investment grade bond. So, if you give up 1.3 percentage points of yield in your return, you get a near guarantee that you'll get paid your interest and initial investment back, with much less risk.

What makes Walmart such a safe bet? First, it's highly unlikely that Walmart will fail to pay off its interest payments. It's also incredibly hard to see Walmart going out of business. These are the bondholder's two main concerns. Will he get paid his interest and his principle?

Based in Bentonville, Ark., the company is the largest brick-and-mortar retailer in the world and the third-largest retailer overall, after Amazon and China's Alibaba, according to financial research firm FactSet.

Walmart is also the largest private employer in the world with more than 2.2 million employees, which is about the same as the population of Houston. If Walmart goes out of business, you'll have a lot more to worry about than getting your money back. You'll be worrying about an economic collapse.

For the twelve months ended July 31, which covered the pandemic's surging demand, Walmart's sales grew $24 billion, or 4%, to $566 billion. That's more than the gross domestic product (GDP) of Sweden, the 23rd largest economy in the world, according to the World Bank.

At the end of the fiscal quarter ended July 31, Walmart had $39.58 billion in long-term debt. It also had $22.83 billion in current assets. That means Walmart could pay off 58% of its debt tomorrow.

With the odds of Walmart going out of business, almost the same as the U.S. government defaulting on its Treasury bonds, we feel pretty confident Walmart will be around to pay us back our original investment when the bond matures.

Overall, the Arthur team thinks this is a great bond for investors trying to build a long-term portfolio with core assets.

 

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