I recently purchased additional shares with Wal-Mart, almost doubling my relatively small position. I wanted to talk a little today about why I made that decision, and why I think now is a great time to continue to accumulate Wal-Mart shares.
A little about the company, per Morningstar:
Wal-Mart Stores, with its $400 billion-plus in annual revenue, dominates the U.S. retail landscape and is growing quickly internationally. Unmatched scale relative to most vendors leads to favorable terms on everything from the products on its shelves to store leases and distribution agreements. These competitive advantages generate positive economic returns and a wide economic moat, a rarity in retail. While Wal-Mart has benefited more than most peers from consumers trading down, we see continued opportunity as the economic recovery is poised to be mild, in our opinion, and international growth remains in its early stages.
I think there are a few key terms in this effective synopsis of Wal-Mart. First, the word “dominates”. Any time I look at a company and analysts use the word “dominate”, I like that. “Wide economic moat” is the other key term here. That’s extremely important in a core position. I think that smaller positions, or riskier plays don’t need an economic moat, and certainly not a wide one. However, if you want a company to be a foundation of your portfolio, this is very important. A wide economic moat usually means a company is seperating itself from the rest of the pack through pricing power, effective supply chain, wonderful products and service, and a brand name that is global.
One of the things that detractors of Wal-Mart look to criticize is the flat share price over the last 10 years. On May 18, 2001 Wal-Mart closed at $52.04. Today, the share price closed at $55.48. That’s a gain of 6.61% over 10 years. Not very encouraging, and when you factor in inflation you would have actually lost money. This lack of gain is due to the fact that Wal-Mart was extremely overvalued back in 2001. Rolling EPS was at $1.40 per share back in May of 2001. That’s a P/E ratio of 37.17! Obviously, valuation is extremely important when purchasing dividend growth stocks, and this cannot be understated. Wal-Mart’s P/E ratio is currently at a very comfortable 12.90. That’s almost 1/3 the price, on a P/E valuation ratio. That’s an incredible difference. Wal-Mart was not a good investment in 2001. I would argue that Wal-Mart is a very conservative and attractive investment today.
Wal-Mart’s fiscal year ends in January, so the numbers below are actually from the preceding year. Let’s take a look at some numbers:
Earnings per share have grown at a rate of 9.3%, compounded annually over the last five years. Pretty impressive, and the pace of growth has been pretty evenly spread, even through the recession.
Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2011 0.88 0.97 0.95 1.41 4.18
2010 0.77 0.88 0.84 1.23 3.72
2009 0.76 0.86 0.77 0.96 3.35
2008 0.68 0.86 0.70 1.03 3.16
2007 0.64 0.72 0.62 0.95 2.92
2006 0.58 0.67 0.57 0.86 2.68
Let’s take a look at revenue. Revenue over the past five years has grown by just over 6% per year, compounded annually. Good numbers here, and again it’s pretty even spread on the pace of growth through the years.
Revenue (Million $)
1Q 2Q 3Q 4Q Year
2011 99,097 103,016 101,239 115,600 421,849
2010 94,242 100,910 99,411 113,651 408,214
2009 94,070 101,544 97,634 107,996 405,607
2008 85,387 91,990 90,880 106,269 378,799
2007 79,613 85,430 84,467 99,078 348,650
2006 71,680 76,811 75,436 89,273 312,427
Dividend growth is, of course, my favorite metric to look at. Dividends have grown just over 15% over the past five years, compounded annually. That’s an extremely healthy rate, and if you go back further, the growth rate holds pretty true. Phenomenal growth rate. The payout ratio is currently at 34%, so there is plenty of room for further growth which is very exciting. The current entry yield is low at 2.63%, compared to most other dividend stocks, but this is historically high for this company. Overall, I’m satisfied with that entry yield, coupled with the high growth.
Dividends Per Year($ Per Share)
S&P currently has WMT at a 5-star STRONG BUY. I generally agree with that.
Overall, I’m excited about Wal-Mart’s future growth. The international growth of Wal-Mart is especially appealing at a time when Target and Family Dollar appear to be eating away at some of Wal-Mart’s domestic market share. Wal-Mart’s international division seen net sales grow by 12.1% over the last year. They grew their international footprint by 458 new stores, which is encouraging. I think that the international division is going to fuel growth with this retail giant. Margins are generally low with retailers, and with other stores eating away at their domestic market share, it’s important to have growth in terms of overall square footage overseas. The more stores, the more products and more sales. Wal-Mart has been dominating in their ability to crush the competition through effective supply chains, and offering the lowest prices possible. One key development with domestic stores is the new “Low Prices. Every Day” campaign, which includes bringing back thousands of products that were previously removed from stores and price-matching on competitors’ ads.
I like this company at its current valuation. It’s trading at a very favorable P/E ratio and a high historical yield. It has a lot of opportunity for future growth, especially in the international and emerging markets. The growth in China could be explosive, as Wal-Mart currently operates 189 units in China, which is extremely paltry for a country the size and scope of China. I’m a buyer at current prices.
What about you?
Thanks for reading.