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, VIN COLBY (17 clicks)
Long only, dividend growth investing, large-cap, mega-cap
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The Walton family is the richest family in the world, excluding, perhaps, some royal families. Its main members are the children of the founder Sam Walton: S. Robson Walton, Alice Walton and Jim Walton. Christy Walton, currently the richest of the Waltons, is the widow of John Walton, the fourth child of the founder. Collectively, they are worth over $100 billion and have received a total of $2.5 billion in dividends from Wal-Mart (NYSE:WMT) during 2011. They own 50.4% of the company.

Wal-Mart Stores is like an investment fund for this family, but their vast wealth may be a hindrance for new investors. Do they really need more than $2.5 billion to live off in a year? The future of Wal-Mart may depend on how aggressive this family at the top will be. Judging by their ancestor Sam Walton, the competitive gene should be abundant in this family. There is also an increasing number of heirs. Their company is challenged by various internet retailers, and they will need some start-up vigor and enthusiasm in the years and decades ahead.

For the sake of this article, I shall compare two retailers which have been stellar performers in the past decades, their financial numbers leave nothing to be desired, but, there must be a better one to invest now:

Wal-Mart

Costco (NASDAQ:COST)

P/E

14.24

24.62

Current yield

2.30%

1.09%

Gross margin

24.86%

12.45%

Net profit margin

3.73%

1.80%

Total revenues (USD millions)

446,950

99,137

Total revenues growth (4 years)

4.34%

8.14%

Net income (USD millions)

15,699

1,709

Net income growth (4 years)

5.21%

7.43%

FCF*(USD millions)

10,745

1,577

FCF growth (4 years)

17.14%

26.95%

Total cash dividends paid (USD millions)

5,048

446

FCF / Total cash dividends paid

2.13

3.54

EPS growth rate (4 years)

9.48%

7.71%

PEG** ratio

1.50

3.19

Number of locations worldwide

10,130 (annual report, p. 57)

622 (annual report, p. 6-7)

*Free Cash Flow = Total cash from operations - Capital expenditures

**PEG ratio (PEG) = P/E ratio / EPS growth rate

Source: ft.com and msn.com

Peter Lynch argued in his 1989 book One Up on Wall Street that "The P/E ratio of any company that's fairly priced will equal its (EPS) growth rate". This means that a fairly-valued company should have its PEG equal to 1.

According to Mr. Lynch, both of these companies are overvalued. But Costco is far more so. Buying Wal-Mart you get more than double Costco's dividend yield, amply covered with free cash flow.

With Wal-Mart, you also get a more diversified business, which blankets the entire United States (except New York City) with double the profit and gross margins of Costco. Many are scared by the proliferation of Wal-Mart's smaller format stores in big U.S. cities but this Wal-Mart on NYC's doorstep has rather good reviews

I believe Costco is a fad, and will fade away with years. Just take a look at this list of rather trendy items you 'must' buy at Costco, including Chateauneuf-du-Pape wine and genuine French chocolate truffles. Costco does have a catchy name (certainly more appealing than Sam's Club) and a clean image, but the current market valuation does not justify buying at this moment.

For those of you interested to know more about this Costco 'craze,' I advise you to watch this CNBC special: The Costco Craze: Inside the Warehouse Giant, CNBC 2012.

Disclosure: I am long WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Wal-Mart And Costco Compared