Wal-Mart: The Time To Buy Is When No One Likes A Quality Dividend Company

| About: Wal-Mart Stores, (WMT)


This dividend champion has paid a dividend since 1974 and increased it for 41 years in a row.

Wal-Mart has a wide moat, since it is the lowest-cost retailer. Unfortunately, company is so high that future EPS growth is unlikely to exceed 6%-7%/year.

Wal-Mart is attractively valued at 14.40 times forward earnings and yields 2.60%. I believe Wal-Mart has what it takes to be successful for the next 20 years.

Wal-Mart Stores Inc. (NYSE:WMT) operates retail stores in various formats worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. This dividend champion has paid a dividend since 1974 and increased it for 41 years in a row. Wal-Mart is also one of the 60 companies, which could be purchased commission-free using Loyal3, with as little as $10.

The most recent dividend increase was in February 2014, when the Board of Directors approved a 2% increase in the annual dividend to 48 cents/share. This was the slowest dividend increase ever for Wal-Mart Stores. It is likely that management does not expect high earnings growth in the next couple of years, given by the very low hike in distributions in 2014.

The largest competitors for Wal-Mart include Target (NYSE:TGT), Costco (NASDAQ:COST) and Dollar General (NYSE:DG).

Over the past decade this dividend growth stock has delivered an annualized total return of 5.70% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

The company has managed to deliver a 9.10% average increase in annual EPS over the past decade. Wal-Mart is expected to earn $5.16 per share in 2014 and $5.64 per share in 2015. In comparison, the company earned $4.85/share in 2013.

Wal-Mart has consistent history of share repurchases. The company has been able to reduce the number of shares outstanding from 4.266 billion in 2005 to 3.266 billion in 2014.

Wal-Mart has a wide moat, since it is the lowest-cost retailer. Its sheer scale gives it a pricing advantage in negotiating with suppliers and its investment in technology allows it to gain further efficiencies across its value chain, thus offering lowest prices in a market. The moat is further strengthened by the fact that many consumers perceive the retailer as having the lowest prices, even if that might not be the case in all categories. Another nice thing to note about Wal-Mart is that the majority of merchandise is sold before the company pays its suppliers, due to constant monitoring of sales and inventory. Therefore, it enjoys the type of float where it essentially earns money without the need for too much capital.

The company has recently refocused its strategy on maximizing return on investment from existing US stores, rather than focusing exclusively on square footage growth. By remodeling stores, and improving their ambiance, it could not only retain its shoppers but even attract different target groups. Its everyday low prices strategy in the US allows the company to match prices by competitors on items that happen to have lower prices that Wal-Mart. It would take a competitor a considerable investment in a number of stores, distribution centers, technology and logistics in order to emulate Wal-Mart's business model.

The opportunity in the US is through opening smaller Neighborhood stores, which will compete with dollar stores. The company is also pursuing an effort to grow its online sales. It offers something that Amazon does not have -- the ability for the consumer to order online and pick up in store. That extra store traffic could also result in additional sales at the physical location.

Its international segment however is expected to have low double digit growth in square footage. International currently represents an important opportunity for growth, as it only generates one-third of the company's revenues. Future growth in its international segment could come from acquisitions, as well as organic growth. Wal-Mart is just getting started in certain key markets such as China and India, for example. The combination of rising populations, increasing per capita incomes and providing an efficient retailing experience are some of the characteristics that could fuel growth in international.

The annual dividend payment has increased by 18% per year over the past decade, which is much higher than the growth in EPS. This was possible mostly due to the expansion in the dividend payout ratio. Future growth in dividends will likely match the rate of increase in earnings per share.

An 18% growth in distributions translates into the dividend payment doubling every four years on average. If we check the dividend history going as far back as 1974, we could see that Wal-Mart has actually managed to double dividends almost every three years on average.

In the past decade, the dividend payout ratio increased slightly from 21.60% in 2005 to 38.80% in 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The return on equity has remained largely between 20% and 24% over the past decade. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, Wal-Mart is attractively valued at 14.40 times forward earnings, and has a dividend yield of 2.60%. I believe that Wal-Mart has what it takes to be successful, and endure changes over the next 20 years. Unfortunately, the company is so large that its future profits growth might not be that high. The valuation is compelling, but the expected earnings per share growth is not going to exceed 6%-7 % per year. That being said, I will hold on to my existing position, and might consider adding a little more this year, subject to availability of funds and other ideas.

Disclosure: The author is long WMT, TGT.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.