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In the Headlines-September 5th, 2014

In The Headlines

Walmart Becomes a Healthcare Provider

Wal-Mart has been conservative when it comes to retail clinics, partnering with regional hospitals to offer services like flu shots. But now, the retailer is taking a more aggressive tack, with in-store branded clinics offering primary care at a price competitors may find hard to match. “It was important to Wal-Mart that we be able to maintain or be a price leader in this space,” said Jennifer LaPerre, Wal-Mart U.S. senior director for health and wellness, who is overseeing the rollout of the company’s new Walmart Care Clinics. LaPerre was in Carrollton, Georgia, in the foothills of the Appalachian Mountains, to open the ninth Walmart Care Clinic. Three more are planned this year as part of a pilot program to offer primary care services such as health screenings and disease management of conditions like diabetes and high blood pressure in-store.

The price is just $4 for employees and dependents on the company’s health plan. For customers, the price is $40, about the same as an online telemedicine consultation with a doctor. “We wanted to be able to monitor and manage and control price. We wanted to be able to focus on a scope of services that were meaningful to our customers and associates,” LaPerre said. Wal-Mart is able to price it that low, in part because the clinics are staffed by nurse practitioners from Quadmed, a provider of on-site workplace clinics. “These particular services that are going to be provided are really ideal for a nurse practitioner to manage,” said Dr. David Severance, corporate medical director for Quadmed, though each clinic is overseen by a supervising physician.

Severance expects the low price could make a big difference for patients with conditions like diabetes and hypertension, who need to get check-ups every three to six months. “If a patient has a fairly sizable co-pay, just to see the provider for each one of those visits, there’s a much greater likelihood that they won’t follow through with what the prescribed treatment is,” he said. Offering its employees a visit with a nurse practitioner for the price of a latte at Starbucks could also help Wal-Mart control its own health-care expenses.

Earlier this month, the retailer revealed its health costs were expected to increase by $500 million this year because more of its workers than expected are signing up for its health-insurance benefits. While Wal-Mart will not discuss possible reasons for the enrollment surge, the push for Obamacare enrollment likely played a role, according to Neil Trautwein, a vice president at the National Retail Federation. In states that opted out of Medicaid expansion, Wal-Mart workers may not have been able to get subsidies for health exchange plans. Under the Affordable Care Act, subsidies kick in for those making over $15,900 a year. “To the extent that a state has not expanded Medicaid and the individual faces their own obligation to obtain coverage, then that may make an employer plan more attractive,” Trautwein said.

Wal-Mart is launching the clinic pilot program in three states that did not expand Medicaid—Texas, South Carolina, and Georgia—states that also have a high concentration of uninsured residents. “With their in-store clinics, that’s a pretty good way to handle that added enrollment and first-time health coverage consumers,” Trautwein said. But it’s just as important to Wal-Mart to leverage the clinics to drive overall sales. “As we look at the business model … it was not just about looking at the clinics in isolation,” LaPerre said. “The traffic coming into the Walmart Care Clinic really benefits the entire box.”

Consumer-directed health-care services represent a $235 billion market, according to the Advisory Board Company, a health-care research and consulting firm. Wal-Mart could become a big player through its clinics. “Providers have a choice to make. They can either compete with many of these retail providers, by offering lower-cost services that are not just cheaper, but are also more convenient and of a higher service standard, or they can partner with them,” says Christopher Kerns, a managing director at the Advisory Board.

Few providers could compete with Wal-Mart’s $4 office visits for its associates, and it is not clear the retailer could ever make that price point work for its customers. So, why make it that cheap? “The $4 price point was not magical. There wasn’t a lot of science. For us, it was about being consistent,” LaPerre said. The company was the first to introduce $4 generic drugs at its pharmacies in 2006, prompting others to lower their pricing on generics. “That has brand recognition, and candidly, was meaningful from an offering compared to the health-care industry,” she added. Call it a $4 wake up call to providers: Wal-Mart is getting serious about health care.


Battle for the Bottom – Dollar General vs. Dollar Tree

In a year marked by heavy merger-and-acquisition activity, few takeover contests have matched the intensity of the bidding for Family Dollar Stores. The battle between Dollar General and Dollar Tree for control of the North Carolina-based discounter has the kind of intrigue and promise of riches usually reserved for television dramas. At issue is who will dominate lower-income and small-town discount retailing in the U.S. now that Wal-Mart Stores has moved more upmarket. “It’s one of the best opportunities in retail,” says Edward Jones analyst Brian Yarbrough. “There are a lot of small, rural markets that can’t support a giant Target or Wal-Mart (whose largest stores can exceed 170,000 square feet), but can support a 7,500-square-foot dollar store.”

To snare the low-end discounting crown, Dollar Tree in struck a deal to buy Family Dollar for $9.2 billion. By combining Family Dollar’s 8,200 locations with its own roughly 5,000 stores, Dollar Tree would have the largest number of discount outlets in the U.S. The merger would also help Dollar Tree, the only one of the three that actually sells all its merchandise for a dollar or less, to quickly become a major retailer offering goods at all price points.

Dollar General, which had been negotiating its own buyout offer for Family Dollar when Dollar Tree’s surprise takeover was announced, refuses to walk away quietly. Instead, the 11,300-store retailer tried to scuttle the deal by making a $9.7 billion counterbid for Family Dollar. The firm also says it will pay the $305 million breakup fee that would be due Dollar Tree if Family Dollar accepts the higher offer.

Family Dollar is a surprising target. The No. 2 U.S. discounter by number of stores (behind Dollar General) with revenue of $10.4 billion in the past 12 months, the chain has struggled with declining sales at stores open for more than 13 months because its prices have become too high for many cash-pinched customers. To counter that, Family Dollar lowered prices on about 1,000 items this year. Still, there is potential to turn things around in a merger, says Yarbrough.

Neither Dollar Tree nor Dollar General would be eager to compete against whichever of them does manage to bag Family Dollar, since the resulting behemoth would have more buying clout with suppliers. That would help the winner keep prices low, a key selling point for this type of retailer. “Dollar stores have a valid place, especially after the recession,” says Wedbush Securities analyst Joan Storms, adding, “People that traded down, they aren’t trading back up.”

Most analysts say a Dollar General-Family Dollar merger makes the most sense, as both stock similar goods—housewares, apparel, and food along with other consumables—and sell them at a wide range of prices. Yet there is concern that combining two such similar discounters into a 19,584-outlet chain would raise antitrust questions. Dollar General says it is prepared to sell as many as 700 stores to appease regulators. Family Dollar might still be willing to reconsider Dollar General’s higher offer if the suitor commits in advance to completing its deal even if federal antitrust regulators require that far more stores be divested, people familiar with the matter who were not authorized to comment publicly told Bloomberg News.

Given the strategic advantages for both suitors, many on Wall Street think the courtship is far from settled. Edward Jones’ Yarbrough says both bidders have solid management teams and can be successful, but the deal will be more beneficial to Dollar General’s earnings, which should enjoy greater savings because of its similar business model.

Sources:

1. http://cnb.cx/1qnjtYf – CNBC
2. http://buswk.co/1Ckdl9o – BusinessWeek


The Good News Is . . .

• The government reported that its second estimate for second quarter gross domestic product (GDP) growth came in a little stronger than expected, rising 4.2% on an annual basis versus a 4.0% forecast by many economists. This followed a 2.1% weather related drop in the first quarter. This second estimate for the second quarter confirmed the general picture of solid economic growth.

• TJX Companies Inc., the leading off-price apparel and home fashions retailer in the U.S. and worldwide, reported earnings of $0.75 per share, an increase of 13.6% over year-ago earnings of $0.66. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $6.9 billion, an increase of 7.4%. Management attributed the company’s results to increasing customer traffic in its existing stores, solid merchandise margins, and improved performance of the firm’s apparel businesses.

• Burger King announced its offer to purchase Tim Hortons, the Canadian doughnut-and-coffee chain, for $9 billion. The deal would create one of the world’s biggest fast-food businesses. If completed, the deal would mean Burger King’s corporate headquarters would move to Canada, raising the specter of yet another American company switching its national citizenship to lower its tax bill. The combined companies would have about $22 billion in revenue and more than 18,000 restaurants worldwide.

Sources:

1. http://bloom.bg/1bidM2T – Bloomberg
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1lEW7yE – TJX Companies, Inc.
4. http://nyti.ms/1pYRsax – NY Times Dealbook


Planning Tips

Understanding Dividend Reinvestment Plans

Companies offer dividend reinvestment plans as a way for their shareholders to buy stock directly from the company in very small to large amounts, and usually on a monthly basis if desired. These plans get their name from the fact that they also reinvest dividends paid, using these dividends to purchase more stock. Below are some guidelines to help you better understand the risks and benefits of such plans.

Understand how a dividend reinvestment plan works – A dividend reinvestment plan (DRIP) automatically takes the dividends you earn from a stock and reinvests them back into the stock. For example, let us say you own 100 shares of a stock that pays a $0.50 quarterly dividend per share. Then each quarter you would receive $50. If you are enrolled in a DRIP and the stock is trading at $100 a share, that $50 is automatically reinvested to buy you half a share. At the end of the year, you would have 102 shares that would now pay a total quarterly dividend of $51.

Evaluate the options – Company-operated DRIPs are commission-free because there is no broker required to facilitate the trade. Some DRIPs offer optional cash purchase of additional shares directly from the company, usually at a 1-10% discount and with no fees attached. DRIPs are flexible by nature. Investors are able to invest large or small amounts, depending on their financial position. Some DRIPs allow investors to contribute as little as $10 or as much as $500,000 at one time.

Consider combine a DRIP with dollar-cost averaging – Dollar cost averaging is the process of investing a fixed amount of money over time at regular intervals instead of investing one lump sum of cash into a stock. The purpose of dollar cost averaging is to help you buy more shares of a stock when its price is low and fewer shares when its price is high. When you combine dollar cost averaging with a dividend reinvestment plan, you can benefit from owning a larger number of shares, thus increasing the dollar amount of your dividend, and finally the ability this gives you to purchase even more shares through the DRIP.

Be aware of the tax implications – Automatically reinvesting dividends through a dividend reinvestment program can cause complications at tax time if you have any stock sales because every time you reinvest a dividend automatically back into the security that paid it out, your cost basis in the originating security is changed. If you participate in a DRIP for many years you will have to keep track of numerous small stock purchases as part of determining your cost basis for the stock. New tax rules require brokerage firms to track and report your cost basis to the Internal Revenue Service, so this task should become more manageable.

Determine the risks – Like other long-term investment strategies, this one requires attention to the fundamentals of the investments you choose as well as patience. You need to recognize that this strategy can take 10 years or more before you start seeing significant income from your portfolio. Your returns can be diminished if you need cash and have to liquidate part of your portfolio. Also, the companies paying dividends may cut or eliminate them if they run into trouble. As with all investments strategies, it is a good idea to consult your financial advisor before proceeding.

Sources:

1. http://bit.ly/1r6UBp0 – Investopedia
2. http://bit.ly/1uaEoiX – U.S. News & World Report
3. http://bit.ly/1A0ydyJ – DividendMantra.com
4. http://abt.cm/1vFxt49 – About.com
5. http://bit.ly/1nnIG1o – The Motley Fool
6. http://nyti.ms/1qVrKjD – New York Times

Please don’t hesitate to give us a call if you need help with any component of your financial planning.

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