Wal-Mart (WMT) has given its investors a capital appreciation [YTD] of almost 27% and a dividend yield of 2.5%. On the other hand, its close rival Costco (COST) is not very far behind. Costco's dividend yield is around 1.1% and it has given its investors a capital gain of almost 18% [YTD]. I believe both COST and Wal-Mart are being steered in the right direction by their managements. However, the question is: which one of these will perform better during the upcoming fiscal cliff and handle the "pre-fiscal cliff "pressure in December, 2012?
Wal-Mart's P/E [TTM] is 14.85x, while its EPS and PEG are $4.86 and 1.60 respectively. Using this P/E and PEG, we arrive at a growth rate of 9.28%. Incorporating its dividend yield into PEG, we get a PEGY of 1.29.
Valuation - Industry P/E
Valuation - Nasdaq Index P/E
Using an industry P/E of 18.5x, we value Wal-Mart's stock at $99.50 (Consensus EPS). The stock is currently trading at $72.12, showing that it's still an undervalued stock.
As far as Costco is concerned, its P/E is 25.37x, while its EPS and PEG are $3.89 and 1.75 respectively. Using this P/E and PEG, we arrive at a growth rate of 14.5%. Its PEGY comes out to be 1.63.
Valuation - Industry P/E
Valuation - Nasdaq Index P/E
Using an industry P/E of 18.5x, we value Costco's stock at $100.10 (high EPS). The stock is currently trading at $98.90 showing that it's almost trading at its fair value.
On paper, Wal-Mart seems to be the more attractive buy among the two, but recently, Wal-Mart has caught a lot of negative attention especially in South Asia. The recent fire in Bangladesh apparel factory, that killed 114 people, has also damaged Wal-Mart's reputation to some extent. Earlier, the retailer announced that it won't be able to help in building fire proof factories in Bangladesh because of huge investments associated with the plan.
On the 12th of December, 2012, the Indian government accused Wal-Mart of pressing U.S. lawmakers to gain unfair advantage in the international retail market. As a result, the Indian government has announced an investigation into Wal-Mart's lobbying practices. Wal-Mart says that it had paid in excess of $25 million to U.S. lawmakers in order to gain access to the international markets. The Indian opposition called for an investigation, so that it can be known whether the same thing happened in India. Moreover, Wal-Mart has been facing a lot of criticism on its low wages and labor policies in the U.S as well.
On the other hand, Costco has doing really well in almost everything. On 12th December, 2012, Costco announced its Q1 profits for the fiscal year 2013. The Wholesale Corp. performed better than the analysts' expectations, with an EPS of $0.95 instead of projected EPS of $0.93. The CEO of the company had kept his faith in low pricing; as a result, net sales increased to $9.6 percent from last year's quarterly sales.
The discussion of foremost importance: which one of these companies has made the right decision prior to fiscal cliff? As it is expected, the dividends would be taxed at 39.5% percent instead of 15%, so the firms want their shareholders to benefit from this 24.9% tax benefit prior to 2013. As a result, Wal-Mart said that it would give its shareholders an accelerated dividend of $0.3975 per share on Dec 27, 2012, which was earlier scheduled to be paid in January, 2013. Wal-Mart's competitor, Costco announced that it will give its shareholders a quarterly cash dividend of $0.275 per share, plus a special cash dividend of $7 per share on Dec 18, 2012. Costco has taken $3.5 billion debt in order to finance its special dividends; this may worry some investors. According to Costco's CFO Richard Galanti, the company has access to a fairly cheap debt, so they want to capitalize on it.
In case of Wal-Mart, more than 51% shares are still owned by the Walton family, which means that the major chunk of accelerated dividends would go to one family. On the other hand, Costco's case is totally different; there's no such majority like Wal-Mart. The million dollar question is: which one of these companies did the right thing? With a growth rate of almost 14.5%, Costco should have re-invested this money in the business. Instead, the company decided to give special dividends this year in order to satisfy its investors. Wal-Mart has done the right thing by keeping its eye on its long-term goals by announcing accelerated dividends only.
Having said all this, we need to analyze is which one of these stocks will perform better in the long term? As Wal-Mart is facing a lot of disapproval for its policies in the U.S. and in Asia, its stock value is bound to get hit by that (only in the short term), but not to a large extent. Whatever we say about Wal-Mart, we can't forget that it's still the biggest retailer in the world, and has been minting billions of profits for a long period of time. When you have such a large scale business, you will always come across these kinds of issues.
In short, Wal-Mart's price would dip to some extent in the coming days due to issues in South Asia. After that, it will become a huge buy for investors. With a growth rate of 9.28%, it will continue to generate substantial profits in coming years. We estimate its price to finish around the $95 mark at the end of 2013. As far as Costco is concerned, it will continue to perform in accordance with its past performance. It's also expected to do great in 2013, but its current price doesn't make it as attractive as Wal-Mart. So, my vote goes to Wal-Mart.