-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.
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.
Over this time period, WMT has grown revenue by an average of 7% per year.
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
WMT has grown cash flow by approximately 10% per year on average over this time period.
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.
Walmart currently has a dividend yield of about 2.35% and has a high dividend growth rate combined with a low payout ratio.
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.
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.
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.
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.
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.
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