Why I’m Buying Wal-Mart

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)
2010 1.21
2009 1.09
2008 .95
2007 .88
2006 .67
2005 .60

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.

Comments

  1. says

    Just part of the picture you present here.

    Sure, international top-line results were stronger and compensated for weak Q1 sales in domestic stores. But, as a company Walmart had only 4% top-line growth and some of this was due to currency.

    Walmart’s current strategy focused on increasing sales by scaling up on certain merchandise categories that are necessarily as profitable as their core merchandise. E.g. groceries.

    Walmart is facing a tough time squeezing more efficiency out of its supply chain, operations, and demanding lower costs from suppliers.

    Macroeconomic deflation in groceries and other merchandise categories will have a negative impact on Walmart’s operations and profitability

    Walmart’s has a poor record of long-term accomplishment overseas. They’ve had terrible problems in many countries and have conceded defeat.

    Walmart does not have a strategy for the next wave of expansions in operations / retail strategy / merchandise segments / location. They can only grow so far further from scale of operations and store expansion. Acquisitions will not bring about the scale of growth Walmart needs now and can lead to destruction of shareholder capital.

    I don’t see any more than 4 to 5% top line growth over the next three years. Wait for a 10-15% downslide before you consider this stock especially considering your dividend-paying-value-stock focus here.

  2. says

    Marcus,

    Thanks for stopping by and commenting. I do agree that Wal-Mart has had some speed bumps, but any company with the scale and reach the size of Wal-Mart’s is inevitably going to have some issues, whether it be with expansion (domestic or global), organic growth vs. acquisitions, supply chain issues…etc, etc…and the list goes on. I think they realized that same-store declines cannot continue and I like the fact that they are bringing back more merchandise and I think the price-matching is going to have a net positive effect. It’s all about getting the foot traffic.

    I wonder about your comment on “poor record of long-term accomplishment overseas”. I’m just wondering where that information is coming from? In my research, I found that international operations are growing, with an almost unlimited potential for further growth.

    On your last paragraph, I see limited future growth domestically as they are fully penetrated in many markets. The domestic growth will come with their smaller, urban entries. The international growth will be the fuel on the fire. I’m not sure if a 10-15% slide is really necessary as they are trading at a historically low valuation already.

    Take care.

  3. says

    Mr. Mantra
    All ur articles are boring and run of the mill dividend stocks and in almost all ur article, u r trying to impress people by using buffets terminology like “MOAT” and “WILD MOAT” etc…
    Instead of trying to impress people with these words, put some weight of reserch and reasoning into ur article.

    Also, there are trillions of articles of these household dividend names like MO, MCD, T, JNJ, PG etc, so if u have to write a new articles and then may be write on not so frequent names like CHD, HGIC which are not written so often.

    Also, I think, on a income of 40000, assuming that 15% will go in tax, so 34K, and u plan to save 15K/year ….19K for whole year… may be in Ramen noodles…

    Also I understand the point of saving and aiming for retirement, but what is the point of not enjoying the life in youth and saving stuff for old age when even if u want, u can’t enjoy. Biological clock does put some limitation.

    Your approcah, bio, articles etc seems really weired to me .

    Sorry for being candid …

  4. says

    Vikash,

    All I can say is that if you don’t enjoy the blog and my articles, the world wide web is full of other websites you may enjoy more. Perhaps you should spend more time in those other spots.

    I have written an article on HGIC already, perhaps you should investigate more of my site before criticizing.

    I enjoy my youth just fine. While you may equate “enjoyment” to “spending money” I don’t, and there are a whole lot of other people that don’t. I don’t need to need to spend a night on the town and go out to the fanciest restaurant in the city to validate my life. Although, I would rather you not live like me and spend more of your money on a consumerist lifestyle. It fuels the profits of the companies I invest in ;).

    Best regards.

  5. Anonymous says

    Vikash may be a genius but when I see he doesn’t like to spell out the word “you”, “your” and “are” I stop reading. I can’t help it. Immediately my brain categorizes him as not worth reading or unimportant.

  6. says

    Anonymous,

    The bigger concern I had was his term “WILD MOAT”. That was more than just a simple misspell. That seems to me that he actually believes it’s a wild moat, not a wide moat. That would lead me to believe he doesn’t fully grasp stocks or investing in general. I always try to fully understand something in my own mind before criticizing someone.

    Take care.

  7. says

    I would like to say something postive about walmart. All the negative news about walmart it keeps comming. But the fact is consumers have benefited enormously from the ability of walmart to buy in mass and pass along the lower cost on to their customer in the form of lower prices. Also the notion that walmart pays substandard wages is also false. Their wages and benefits are significantly higher than their competitors.

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