Will Whole Foods Market, Inc. Raise Its Dividend in 2016?

“Accordion-sliced herbed

potatoes” image source: Whole Foods

Market

Whole Foods Has

Experienced A

Challenging 2015

Fiscal 2015 (which ended September 27, 2015) wasn’t an easy one:

• Comparable store sales slumped, and turned slightly negative by Q4 2015.

• The company was besieged with competition in the natural and organic foods segment.

• Still, Whole Foods was quite profitable, earning $536 million on $15.4 billion in sales.

• The grocer generated positive cash flow of $1.13 billion from operations.

• It shared a significant portion of excess cash with investors:

““Through our strong balance sheet and robust cash flows, we self-funded our new store development and strategic growth initiatives while returning close to $700 million to our shareholders through dividends and share repurchases, ending the year with approximately $582 million in cash and investments.”

--Whole Foods Co-CEO John Mackey, on the company’s Fiscal Q4 2015 Earnings Conference Call

Going back to 2013, Whole Foods has consistently returned cash to shareholders in a range of between $600-$750 million each year.

Cash Returns

Logo: Whole Foods Market

Dividends + Share Buybacks

2015

⊡ Dividends: $184 million

⊡ Share repurchases: $513 million

⊡ Total: $697 million

2014

⊡ Dividends: $170 million

⊡ Share repurchases: $578 million

⊡ Total: $748 million

2013

⊡ Dividends: $508 million*

⊡ Share repurchases: $125 million

⊡ Total: $633 million

Fiscal years 2015, 2014, and 2013:

*includes a special cash dividend of $1.00 per common share.

Whole Foods is Serious About Shareholder Returns

Perhaps in response to investor misgivings after a steep stock decline in 2015, Whole Foods management announced a massive share repurchase alongside Q4 2015 earnings:

● $1 billion share buyback.● Financed with new debt.● Brings total repurchase authorization to $1.3 billion.● Buyback will be completed in the first half of 2016.

2016: Whole Foods Is

Projecting A Solid, If Not Explosive

Year

Management Guidance for Fiscal 2016:

• Revenue growth of 3%-5%.• Square footage growth of 7% or

greater.• 30 new stores, including 3 new

“365 By Whole Foods Market” concept stores.

• Capital expenditures totaling roughly 5% of sales.

The Big Picture:Though revenue growth has slowed, Whole Food’s financial model is still potent, delivering ample cash flow and high profits relative to the grocery industry. The company will have the means to deliver a dividend increase in 2016 if management and the board of directors choose to do so.

Management MUST Consider:

Capital ExpendituresThe company must pay for fixed assets, including those tied to new store expansion, before cutting checks to shareholders. Capital expenditures, or “Cap-Ex,” come before cash shareholder returns in priority.

Management MUST Consider:

2016 Cap-ExAs we pointed out in a previous slide, Whole Foods expects Cap-Ex to run about 5% of sales in fiscal 2016. That’s approximately $800 million based on the company's projected revenue range for next year.

If Whole Foods again generates above $1.1 billion in operating cash flow, it should have enough left over after Cap-Ex to fund its dividend of roughly $191 million. This also would appear to bear well on the potential for a 2016 dividend increase.

Other Management Considerations:1) Payout ratio: This is the total dividend payout

expressed as a percentage of net income. Whole Food’s recent payout ratio of 35% is well within recommended benchmarks.

2) Whole Food’s falling share price during 2015 has increased the dividend yield from 1% at the beginning of the year, to nearly 1.6% currently. A more aggressive dividend increase in 2016 would compensate in some small measure for a languishing stock price.

Going Forward

1. Whole Foods Market’s financial model still provides attractive profits and cash flow, despite near-term sales challenges.

2. The grocer’s current guidance implies available firepower for another dividend increase, to be declared during the latter part of calendar year 2016, which would be effective for fiscal 2017.

3. Whole Food’s pending huge 2016 stock repurchase sends a strong signal that management is keyed into shareholder returns, making a 2016 dividend increase all the more likely.

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