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Wal-Mart Stores Inc (WMT) Dividend Stock Analysis

Summary

-Walmart (WMT), among the largest companies in the world, appears to be a good option for placement consideration in a dividend growth portfolio.
-Four year average revenue growth: 7%
-Four year average earnings growth: 6% (with EPS growth of 8%)
-Four year average cash flow growth: 10%
-Moderate debt levels, a 2.35% dividend yield, and significant share repurchases
-The stock currently has a P/E of about 13.5, which is a pretty good deal on this type of company.

How to Read My Stock Analysis Reports

Overview

Everyone knows Walmart. Founded in Arkansas in 1962 by Sam Walton, Walmart is now one of the largest companies in the world, with revenue of over $400 billion and with more than 2 million employees. They have stores under a variety of brands in 15 countries around the world. In addition to being a massive retailer, it’s the largest seller of groceries in the United States. Walmart also owns Sam’s Club, which is a membership warehouse much like Costco that offers bulk products for a reduced cost to people that pay for a membership.

Currently, 63.8% of revenue comes from Walmart US, 24.7% comes from International, and 11.5% comes from Sam’s Club.

Walmart is a rather infamous business. It’s criticized for destroying ma and pa businesses and for harsh and discriminatory employee treatment. On the other hand, Walmart has helped save consumers money on everyday items. When hurricane Katrina struck the United States, Walmart used its enormous and efficient logistics system to provide supplies and aid, along with money, faster than the US federal government could respond.

Revenue, Earnings, Cash Flow, and Margins

Walmart’s fiscal year ends in January, so for instance when they report numbers for 2010, the numbers are really for 2009.

Revenue Growth

Year Revenue
2010 $405 billion
2009 $401 billion
2008 $374 billion
2007 $345 billion
2006 $309 billion

Over this time period, WMT has grown revenue by an average of 7% per year.

EarningsGrowth

Year Earnings
2010 $14.4 billion
2009 $13.3 billion
2008 $12.8 billion
2007 $12.2 billion
2006 $11.4 billion

Over this time period, WMT has grown earnings by an average of 6% annually.

While company-wide earnings have grown by 6% per year on average, earnings-per-share (EPS) has increased at a faster pace. For 2006, EPS was $2.72 while EPS in 2010 was $3.72. This translates into more than 8% annual EPS growth. EPS growth is larger than total earnings growth because WMT continually repurchases and cancels some of its own shares, meaning that the earnings become distributed over a small number of shares, and therefore each share receives a larger portion of the earnings.

Cash Flow Growth

Year Cash Flow
2010 $26.2 billion
2009 $23.1 billion
2008 $20.3 billion
2007 $20.1 billion
2006 $17.6 billion

WMT has grown cash flow by approximately 10% per year on average over this time period.

Profit Margin

WMT currently has a profit margin of about 4%, up from their five-year average profit margin of 3.4%. This may seem pretty low, but retailers typically have some of the lowest profit margins around.

Dividends

Walmart currently has a dividend yield of about 2.35% and has a high dividend growth rate combined with a low payout ratio.

Dividend Growth

Year Dividend Yield
2010 $1.09 2.20%
2009 $0.95 1.60%
2008 $0.88 1.90%
2007 $0.67 1.40%
2006 $0.60 1.20%

WMT has grown their dividend by an average of about 16% over this time period, which is very good. The current dividend yield is over 2.3%, among the highest yield that Walmart stock has recently offered, though still mediocre compared to many other dividend stocks.

WMT currently has a payout ratio of around 30%. This means that they pay 30% of their income to shareholders as dividends, and this is a somewhat low number. The company has plenty of room to substantially grow the dividend over the next several years.

Share Repurchases

WMT repurchases a varying amount of shares each year. Their total share repurchases over many of the recent years have exceeded dividend payouts, meaning that WMT is redirecting most of its income to shareholders. Recently, WMT authorized another $15 billion in share repurchases.

Balance Sheet

WMT currently sports a fairly solid balance sheet. They have a LT Debt/Equity ratio of 0.54 and a Total Debt/Equity ratio of 0.71. This implies that WMT is using a manageable amount of leverage in order to grow its business while remaining financially safe.

Investment Thesis

It’s important to invest in companies that have durable competitive advantages over their rivals, and WMT is just that sort of company. Due to Walmart’s immense size, they can purchase products in enormous quantities for very low prices, and then pass those low prices to their customers, thereby beating the prices of most rival retailers. This creates a catch-22, or a negative loop, for rival companies, because in order to grow in size they need customers, but Walmart draws customers away from them with their lower prices, and these rivals can’t usually match those prices because they aren’t large enough. In order to compete with Walmart, companies have to find new ways to offer low prices. Online retailers can cut costs by eliminating many expenses associated with a brick-and-mortar business. Costco derives most of its income with its membership fees, and therefore sells its products at nearly the same price it purchased them in order to try to keep prices low. Still, Walmart is indeed in a very strong and difficult-to-shake position among retailers.

The main growth area for WMT will rely outside of the United States. Walmart has 3,708 retailer locations in the United States and 4,112 locations in other countries, along with 596 Sam’s Club locations. Their number of locations internationally nearly doubled over the past 4 years, while their number of US locations only had about a 13% increase over the same time period. Although ethical or economic questions may arise as to whether something like Walmart should continue to grow, there is basically nothing stopping it from continuing to grow. Their business is straightforward, they generate tons of cash, and they can use that cash to open or acquire new locations in places around the globe. The scalability of this industry is nearly limitless.

In addition, WMT is recession-resistant. In some ways, it even does well in a recession as consumers flock to cheaper options. The company has also been improving the quality of some of its stores to cater to a different demographic group.

Walmart constitutes much of the wealth of the Walton family, so shareholder growth is aligned with management objectives. It’s good to find companies that are at least family owned.

Although it’s difficult for such a large company to grow at a rate that is enticing for investors, WMT seems to offer a reliable and steady growth story combined with dividends and share repurchases to offer a pretty good value. At the current time, the stock has a P/E of only around 13.5. It seems as though Walmart’s stock, along with everything they sell, is at a fairly low price. In comparison, Target is trading with a P/E of about 1.5 and Costco is trading with a P/E of nearly 21. Costco is in my opinion certainly worth a higher valuation, but not by this much of a margin.

Risks

Walmart, like any other company, has risks. When all is said and done, Walmart is really just a middle-man, buying products of others and selling them to you. They are vulnerable to changes in consumer demand.

In addition, Walmart faces some pretty harsh criticism. They are viewed negatively when it comes to treating their employees well, and also have faced numerous charges of gender discrimination. Their rival Costco is known for taking much better care of their employees, and that can go a long way. They also face criticism as part of a larger wave of big businesses that put smaller businesses out of business by being too efficient.

Conclusion and Valuation

Overall, WMT seems to be a healthy and growing large company with a low valuation. The stock may deserve placement as a conservative pick in a dividend-growth portfolio. In my opinion, the stock represents a fairly good value while it remains in the low $50s.

Full Disclosure: I do not own WMT stock at the time of this writing, but it is on my stock watch list for possible purchase.
You can see my full list of individual holdings here.

Further reading:
Automatic Data Processing (ADP) Dividend Stock Analysis
Waste Management (WM) Dividend Stock Analysis
Pepsico (PEP) Dividend Stock Analysis
Exelon (EXC) Dividend Stock Analysis
8 Reasons to go with Dividends

 Dividend Insights Newsletter

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Comments

  1. Another great analysis. I have this one in my portfolio, and it has done fine for me. While the stock appreciation has been very small, it is a solid company and the dividend rate beats bank CD rates. I think WMT is a good place to stash your cash until you need it.

  2. Haven’t they sold Bonds each year about the time the dividends are paid out. Ain’t they over $50 billion in debt. Did they not get kicked out of Germany and South Korea. Do you know if they have ever made a profit in Japan. Can you tell everyone why they moved their Global Procurement Offices to Hong Kong. Can you tell everyone why they moved their Global Procurement Offices from Hong Kong to China. Is it possible that you are one of the few that know the year they made a deal on a port in Mexico between China, a container company from Hong Kong and Mexico. Do you know who owns that container company……

    Have you ever been on their China web page and click “About Us” and read this…

    “Wal-Mart China persists in local procurement which provides more job opportunities, supports local manufacture industry and promotes local economy. So far, 95% of merchandising sold at Wal-Mart China store are local products by which Wal-Mart has established business relations with nearly 20,000 suppliers. At Wal-Mart, we treat suppliers as partners and would like to develop with them. In 2008 Wal-Mart won the Supplier Satisfaction published by Business Information of Shanghai for five consecutive years.”

    If so, does that really support exports and jobs in America. Do you really know the real reason behind Warren Buffett buying that Choo! Choo! train. If Sam Walton came up with the Wal-Mart name why did someone take it on their own to take the hyphen out of the name and replace it with a big single star years after he passed away. Was the star in the name before they moved their Global Procurement Offices to Hong Kong are after they moved it to China.

    Dividends….why not Chimera Investment Corporation, Hatteras Financial Corp, Bristol-Myers Squibb Company, Philip Morris International, Altria Group even General Electric….none invested in a port in Mexico….none put a star in their name and all but two make stuff.

    Remember what Lance Winslow wrote in that article “The Flow of Trade in a Global Economy”….

    “Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what’s in the best interests, and we should make sure that trade is not only free, but fair too.”

    Think for a moment about George Washington….yes the man that is on the US dollar bill….How do you think George feels being sent overseas in return for all that foreign so-call cheap items and being left in a foreign bank because the American worker doesn’t make anything for the foreigners to buy. Cheap items didn’t make this great union of 50 states the greatest place on the face of this Earth…..the American worker (union and non-union) did.

    You can’t have a strong country without having a strong currency and you can’t have a strong currency unless you keep it floating around within your 50 states. This is why the store with the star in the name puts 95% China made items in their stores in China….to keep their “yuan” in their country helping the nice people there. And with only 5% left for all the other 182 country’s that make stuff including the United States of America….that doesn’t produce very many jobs outside of China.

    Being an old person myself and knowing how it was back in the 40′s, 50′s and 60′s in this union of 50 states….I look at George each time I pull him out of my billfold and make a promise to send him out for items made in America so after floating around helping each hand he touches just maybe one day he will shake mine again.

    Fifteen cargo ships pollute as much as 760 million automobiles.

    $9 billion a year in hidden taxes to all American taxpayers to clean fish from ballast tanks of ships…

    think about all those facts the next time you pull that George out of your pocket….

    Retail makes NOTHING…

    Governments only make MORE DEBT…

    It’s time for less of those two and for America to get back to what it does best….MAKE STUFF..

    cause George Washington on that dollar can’t help anyone in the United States of America if he is being held in a foreign hand.

    Made In America is the only way out of this mess cause foreign made put US here.

    oh! one more thing….

    “There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.” -Sam Walton

    Kinda makes a person think maybe the nice people of South Korea and Germany read that a few years back and with six (6) straight quarters of declining same store sales in the United States of America just maybe a few Americans have read it too.

    RETAIL MAKES NOTHING!

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