Friday, July 23, 2010

Wal-Mart (WMT): A High Dividend Growth Stock

Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. Wal-Mart Stores has consistently increased dividends every year for 36 years. The company announced an 11% dividend raise in March 2010.

Over the past decade this dividend stock has delivered a negative average total return of 0.50% annually. The stock is trading at the same levels it was changing hands a decade ago.

The company has managed to deliver an 11.60% average annual increase in its EPS between 2000 and 2009. Next year Wal-Mart is expected to earn $4.01 share, followed by $4.40/share in FY 2011.

With growth slowing down, the price/earnings multiple could contract even lower. This being said I believe Wal-Mart is an excellent business, as it always investing in innovation that helps control inventory and focus on certain types of merchandise that offsets weaker demand in recessions. Despite the expected slow down in consumer spending, Wal Mart is well positioned with its diverse product mix of consumer staples and foods that it is offering on its shelves. It has lower prices in comparison to its competitors, which could drive more traffic for the retailer. Just like Walgreen (WAG), Wal-Mart Stores expects to slow down on the rate of opening new stores and instead would try to focus on developing the profitability of existing locations, without cannibalizing sales in its existing outlets. The lower capital spending has freed up enough cash flow to fund the company's agressive share buyback program.
A potential growth area for the company are its international operations, where selling space has increased by more than 40% since 2006. Wal-Mart (WMT) currently has 267 locations in China, operating under Wal-Mart or Trust Mart’s names. The company had 3615 international locations at the end of 2008. There is still room for growth in Chinese operations, fueled by the increase in number of middle-class families in the country. For Wal-Mart, China represents the biggest frontier since it conquered America. China's voracious consumers are pushing retail sales to a 15 percent annual growth rate; that market will hit $860 billion by 2009, according to Bain & Co. (source).

The Return on Equity has firmly remained above 20%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 18.30 % per annum since 2000, which is higher than the growth in EPS. The disparity is mostly due to a gradual increase in the dividend payout ratio and the billions of dollars the Bentonville, AR based retailer has spend on stock buybacks.An 18 % growth in dividends translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1981, Wal-Mart has actually managed to double its dividend payment every three years on average. Wal-Mart is an example of a company that kept paying dividends while enjoying strong double digit growth for several decades.

The slowdown in capital spending could free up more cash for dividend increases and share buybacks. Thus, despite expectations for EPS growth of 7% over the next few years, Wal-Mart could still manage to deliver low double-digit dividend growth.The dividend payout ratio has been on the rise, although it is still much lower than my 50% threshold. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Wal-Mart Stores is trading at 13.40 times earnings, yields 2.40% and has an adequately covered dividend payment. The company does spend a lot of its cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort.

Full Disclosure: Long WMT


  1. I'm not sure I get WMT or WAG from your charts for 2000-2010. The prices are about the same today as they were in 2000. If you actually bought these in 2000 at today's prices then your yield would have been like .3%
    It will have taken you a decade of dividend increases to get to your current 2.3% yields and with no appreciation in the stock price I think you will have wasted a decade. Utilities usually have nice yields. It would have been better to have bought a nice utility stock in 2000 with 6% yield as long as the stock price is about the same today.
    I'm looking into the market and considering investing as long as I can justify beating my highest debt (currently 4.75% mortgage). Dividend growth is interesting to me since I may not have to screen for stocks yielding >=4.76% but can go slightly lower in hopes that the long run (I'm considering 26 years = 4 years sooner than 30 year mortgage) I can eventually make more than I pay the mortgage company. If not, then I may as well as pay down the mortgage and hope housing prices go back up in about 13 years instead of 26. Thanks for your article and enlightening me to dividend growth, now I have to see if I can figure out just how low yield(s) I may consider and what can of growth rate(s) they'll need to make not paying the mortgage profitable.
    My head is already starting to hurt, utilities would be sooooo much easier!

  2. Thanks for the comment. WMT was overvalued in 2000. WAG was in the same boat. Utilities could have been a good investment. But overallocating to utilities would not be a good bet. Overallocating to financials ( which also yielded ok in 2000) would also not have been a good bet. Utilities pay high dividends today, but their earnings and dividend growth does not compensate enough against inflation.
    Being diversified, dollar cost average into positions, don't overpay for stocks and look for rising dividends coming from strong earnings.


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