Wal-Mart: A Retail Stock for the Coming Decade

Jul.28.11 | About: Wal-Mart Stores, (WMT)

Wal-Mart (NYSE:WMT), not unlike Microsoft (NASDAQ:MSFT), does not have a very strong investor sentiment. Same-store sales have been declining in the United States for the past three years, and the overall stock price has traded sideways since 2000. However, there are many bright spots to Wal-Mart, and several reasons why I consider WMT to be one of the best long-term stocks for this coming decade.

International Growth:

While the US results leave much to be desired in terms of growth, Wal-Mart’s international expansion plan has been performing wonders. Since 2001, Wal-Mart International has grown from 1071 stores to 4557 stores which represents an annual growth of 15.6% in new store openings. Total sales have also rocketed up proportionately ($32.1 billion to $109 billion) at an annual growth of 13%. Annual sales growth is slightly behind annual store openings due to Wal-Mart’s focus on smaller-size “local” stores. The average store size in the US is 162,198 sq ft while the average size of an international store is 62,980 sq feet.

In the past 6 months, Wal-Mart has announced a 51% stake in Mass Mart which is South Africa’s largest retailer. Wal-Mart has also announced a $770 million investment to open 80 new stores in Brazil, and a new initiative to open 168 stores in the UK.

US Growth:

US Wal-Mart: The total number of stores has increased from 2643 in 2001 to 3805 in 2011 (annualized growth of 3.7%). At the same time, US sales have increased ($132.4 billion to $260 billion) at an annualized rate of 7%. Same-store sales, although flat or slightly down in the last three years, have grown at an overall annualized rate of 1.9% ($50.1 million to $68.3 million).

Sam’s Club: Total store count has increased from 528 in 2001 to 609 in 2011, and while that does not represent a large increase, the total sales have increased ($26.8 billion to $4 billion) by 6.2% annually with a same-store sales growth of ($50.7 million to $80.5 million) 4.7% annually.

Bottom-line (EPS) Growth:

While opening new stores and growing revenue makes great headlines, bottom line growth is what will make a long-term investor happy. Over the past 10 years, Wal-Mart has increased earnings per share at an annual pace of 11.5% ($1.41 to $4.18). With the recent Q1 2012 earnings showing a year-over-year growth of 11.4% ($0.88 to $0.98), the 10 year trend is continuing. What is most exciting about these numbers is that Wal-Mart sustained an 11.4% EPS growth while US same-store sales actually decreased. If Wal-Mart can turn around its slight same-store US sales decline, EPS growth could easily reach 15% for the next few years.

Return to Shareholders:

While the 10 year stock price has been relatively sideways (arguably due to a 50 P/E bubble trade-up in 2000), Wal-Mart has shared a significant level of its EPS growth with its shareholders.

Dividends have grown at an annualized rate of 17.96% over the past 10 years (7 cents to 36.5 cents quarterly), and have grown at an annualized rate of 19.5% over the past 5 years (15 cents to 36.5 cents). Although the dividend growth has been strong, Wal-Mart’s dividend payout ratio is only 29% which leaves financial stability and room for further growth.

Along with the strong dividend growth, Wal-Mart also has a large share repurchase program. Over the past 10 years, 22.4% of the outstanding shares have been repurchased, which breaks down to an annual reduction of 2.5%. Wal-Mart recently announced a new $15B share repurchase program. Over the past year (Q1 2011 to Q1 2012) Wal-Mart has reduced its share count outstanding by 6.9% (3.74B to 3.48B).

Assuming the annualized rate of share repurchases and the current dividend yield, WMT is offering a total yearly return of 5.24% which is backed up by an EPS growth of 11.4%.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WMT over the next 72 hours.