There are some excellent businesses that exist in the United States that I normally do not discuss too much in my writing. One of them is Wal-Mart (WMT). By most measurements, the company has been a wonderful long-term holding.
Here are seven useful facts about Wal-Mart's business performance that you may not hear mentioned all that often:
- Reviewing data back to 1997, the company has increased sales per share every single year, at a total average rate greater than 10% annually.
- During that same period, the company has increased cash flow per share every single year, and the "slower growth" worries of analysts over the past decade have actually been overstated, as the company's cash flow per share has been increasing by 12.0% annually since 2002.
- Reviewing the same time period, the earnings per share has increased every single year, going up by 11.0% annually over the past decade.
- Wal-Mart has been raising dividends for 39 years. The dividend rate has increased by 18.0% annually over the past decade. Since 1997, the dividend has grown from $0.14 per share to $1.88 annually today. If you bought $10,000 worth of Wal-Mart stock on January 3rd, 1997, you would have received $123 in annual dividends. Today, that $10,000 investment would be worth $84,830 and paying out $2,088 in annual dividends. This sharp rise was fueled by the fact that, from 2005 through 2011, earnings rose faster than the share price, and dividends rose faster than earnings, allowing investors to reinvest dividends advantageously over this window of time.
- The company's total store count has doubled since 2004.
- Reviewing a decade's worth of annual reports, we can see that Wal-Mart has unmatched consistency in terms of operating margin, as the company's operating margin has remained between 7.4% and 7.9% every year during that time frame.
- The share count has declined every year since 2000, indicating some type of commitment from Wal-Mart management to regularly reduce the share count. In 2000, there were 4.47 billion shares outstanding. Today, there are 3.3 billion.
When we look back at the last 16 years of data, we can see that Wal-Mart has been something of an easy holding for a long-term investor. I say that because the company has delivered remarkable year-over-year consistency. Sales per share, cash flow per share, earnings per share, and dividends per share have a track record of increasing every year without exception.
There is no point over the past 16 years (at least) when an investor had to make a tough judgment call about long-term earnings power because it has never suffered deterioration. Even in 2009, during the worst of the The Great Recession, the annual sales per share increased from $103 to $107, cash flow per share increased from $5.16 to $5.64, earnings per share increased from $3.42 to $3.66, and dividends increased from $0.95 to $1.09 per share. Sure, the share price fell from $63 to $43, but Wal-Mart shareholders could actually see the firm becoming more profitable right before their very eyes just by paying attention to the operating results.
With this kind of stellar performance, it may lead investors to wonder: Is this the kind of company you can feel comfortable tucking away in your portfolio for 20+ years?
The hard part of investing in retail stocks for the long-term is that the general narrative for American retailers in the 20th century goes like this:
- Some retailer or grocer dominates the landscape, becoming the common place to shop in cities and rural areas across the country.
- The company makes immense profits and is often seen as invincible.
- The company gets undercut and falls hard, either going bankrupt or becoming a shell of its former self.
We saw it with A&P. We saw it with Woolworth. We saw it with Winn-Dixie. We saw it with Sears. We saw it with K-Mart. We saw it with Macy's. We saw it with J.C. Penney. Even if some of these companies are still alive, their current existence today is not even close to their former glories of yesteryear.
In the case of something like Wal-Mart, you have to keep in mind that there is limited brand equity. Most people do not adore the source of the product itself (say, compared to the way a consumer would seek out a chocolate bar manufactured by Hershey, or a carbonated beverage manufactured by Coca-Cola), but rather, choose to shop at Wal-Mart because they know the company sells products at a low rate above cost (often, in such a way that the company only nets 3% on many items).
If you are thinking of a holding period in terms of decades, there are three principal risks that you would have to monitor:
(1) Some competitor would be able to outmaneuver Wal-Mart and offer lower-cost items on most products in such a way that it would lose customers. Right now, that is a remote risk. Wal-Mart already consolidates the purchasing power of over 10% of consumers across the globe, and is able to extract deals with vendors that other retailers could only dream of.
Furthermore, Wal-Mart management typically explores further cost-cutting opportunities. Right now, Wal-Mart is targeting $6 billion in cost cutting measures by 2017. Usually, as cost cutting measures are realized, Wal-Mart lowers the price of certain goods, as opposed to trying to add extra profit to shareholder returns. This may cause shareholders to lose a nickel or two per share in earnings today, but it comes with the benefit of entrenching Wal-Mart's moat over the long-term.
(2) Wal-Mart management tries to "reach" for profits. It is unlikely that Wal-Mart could be dislodged if it stuck to its model of only netting 3% profits on certain products. That is hard for competition to beat. The best opening for a competitor to gain some meaningful traction against Wal-Mart would occur if Wal-Mart stores saturated all marketplaces, and to reach for profit growth, Wal-Mart raised prices to appease shareholders.
That is partially what undid A&P. When A&P reported disappointing earnings in the early 1970s, the Hartford family began scrimping on store upkeep and raising prices to offset declining volume/store traffic. If Wal-Mart ever hit a growth wall, it will be useful to monitor the strategy for increasing earnings per share from that point on.
(3) Wal-Mart gets outduelled in terms of convenience. The principal risk here is that foot traffic declines due to a more convenient way to purchase goods (i.e. investors choose to buy goods online or something to that effect). Essentially, the fear is that Wal-Mart will experience the decline in regular consumers similar to what we have seen in malls over the past 25+ years.
That does not strike me as likely because part of the Wal-Mart experience generally involves purchasing food, and the purchase of food is still something that people like to do in person rather than online. And plus, when you go to a store, you have the item immediately. Although consumer shifts have come a long way in the past 15 years (who would have thought you could order a pizza online?), based on present known risk factors, it seems unlikely that Wal-Mart shareholders will get hurt by the emergence of a more convenient alternative in the next five to 10 years.
In most cases, I do not like thinking of retailing stocks as the kind of companies you can hold for decades. The history of the industry is suspect, and invincible companies in the sector can fall quicker than anyone might guess (see Sears for Exhibit A). But with the caveat that you should monitor the risk factors above over each five-year rolling period, I would say that Wal-Mart is as close to a permanent retail holding as you can find. Earnings and dividends have an almost unblemished record of going up each year, and the company represents so much volume and consolidated purchasing power that it is almost unfathomable to think of it getting undercut in terms of cost to the point where it would lose meaningful foot traffic. This fact makes Wal-Mart a reasonable bet for long-term investors looking out 15+ years.