Seeking Alpha
Dividend growth investing, independent research, long-term horizon
Profile| Send Message| ()  

I know that Wal-Mart (WMT) is far from being a sexy investment position and I’m publishing this stock analysis as I am seriously considering adding WMT to my portfolio. I’m almost ready to quit on Intel (INTC) since it is still struggling with the mobile universe and 63% of its revenues are still coming from the past (the PC industry). Since I can sell INTC for a healthy profit (currently sitting at +15% in my portfolio), this is definitely something to consider…

But for now, let’s talk about Wal-Mart and how this stock would fit in my portfolio.

Wal-Mart Business Description

I don’t think Wal-Mart needs any presentation but still, you may ignore that the sky is blue or what Wal-Mart does as a company. What describes Wal-Mart best is its tag line: Everyday Low Prices. WMT operates numerous retail stores selling almost everything and everywhere in the world. It sells goods through five different units: grocery, entertainment, health and wellness, apparel and home. It shows a variety of store sizes and concepts ranging from the small store format to its super gigantic mammoth shopping center. It’s important to note that 60% of WMT revenues still come from the U.S. As U.S. consumer expenses are picking up, Wal-Mart is the place they go!

WMT Dividend Growth Graph

(click to enlarge)

Wal-Mart has a very strong history of dividend growth while keeping its payout ratio very low. Over the past 5 years, the dividend rose by 97.89% (total not annualized rate). This means doubling your dividend in 5 years. You can even go back as far as 2000 and you will still see an important dividend growth policy:

(click to enlarge)

This is basically the reason why I tolerate the stock not paying 3% in dividend yield. I know that in 5 years, the stock will probably pay over 4% in dividends based on my cost of purchase.

The Company Ratios and Financial Info

Dividend yield: 2.23% FAIL

5-Year Dividend Growth: 14.60% PASS

Dividend Payout Ratio: 32.60% PASS

5-Year EPS growth: 8.6% PASS

P/E ratio: 15.39 PASS

Return on Equity [ROE]: 23.44% PASS

5-Year Revenue Growth: 3.4% PASS

From my seven major requirements for selecting a stock, the only place where Wal-Mart fails is the dividend yield. But since the annualized EPS growth is 8.6% and the dividend growth is 14.60%, I think I can overlook the relatively low dividend rate on WMT.

What I also like about the WMT business model is its consistent revenue growth during a tough economic period. While consumers were saving money and paying off debts, Wal-Mart still found a way to generate a 3.4% annualized revenue growth during that period.

Wal-Mart Upcoming opportunities and dangers

WMT continues its expansion across the world, which will increase its worldwide leader position. I can see the “Wal-Mart Business Model Magic” operating in Canada as many grocery retailers (notably Sobey’s, Metro and Loblaw’s) fear their expansion into the grocery industry. With an everyday low price strategy, their margins will continue to be affected by this important competitor.

Most of the returns from this stock will definitely come from share buyback programs and dividend increases. As WMT is sitting on a lot of cash these two factors don’t worry me at all. In fact, this is definitely a reason why I am interested in this stock: steady and predictable cash flow coming in.

On the other hand, Wal-Mart keeps facing slow economic recovery headwinds. There wasn’t much growth in the 2013 sales number and overall it shows negative comparable sales from 2012 to 2013. The exchange rate has been another matter of concern lately as 40% of its business is still done outside of the U.S.

It’s always a big challenge to come up with consistent growth and the market might lose its patience if WMT were to stop delivering good numbers. However, since the P/E ratio is not that high (under 16), I think the shares are fairly valued at the moment and I could certainly take a ride on the dividend growth side.

Final Thoughts on Wal-Mart

In the name of consistency and predictable income, I think Wal-Mart will be part of my portfolio by the end of 2013. After riding the market and notably some techno dividend paying stocks (such as STX and INTC), it’s time for me to consolidate my gains and turn to safer investments. I expect WMT to be part of my core portfolio for several years. I’m confident that, over time, this company will continue selling goods and paying me well!

Disclosure: I just bought WMT; more on that next week

Source: Wal-Mart Dividend Stock Analysis