Yes, I know the story. The stock has traded sideways since 2000 so why should one buy it? But we have to question why that should be a reason to shun purchase. Have investors also stopped investing in the stock market? The price results are identical since the market has also traded sideways since 2000, but accompanied by much slower growth in earnings and dividends. Therein, lies the exact reason to consider purchase of Wal-Mart (NYSE:WMT).
The Story: Very few investors, if any, are not aware of this colossal giant of retailing. The first Wal-Mart discount store opened in 1962 in Rogers, Arkansas. The first international store was opened in Mexico in 1991. Wal-Mart today has 9,667 stores and Sam's club locations in 28 countries. The stores account for 6% of total retail and food sales in the United States.
The Last Decade: As the following chart illustrates, the shares have traded between the mid-40's and the low 60's for the preceding ten years. The earnings per share, however, have grown from $1.64 in 1999 to $4.26, ending 6/30/2011. During the extended trading range the increased earnings have enhanced the value of the corporation causing the valuation to shrink to excellent levels. The arrow on the chart visually pinpoints the beginning of the value build.
Dividend growth also expanded at a rapid pace during this time period. The dividend payment at the end of 1999 was 5 cents per quarter. Today the dividend is 36.5 cents per quarter, which is a seven fold increase in payments. In the first quarter of this year Wal-Mart increased the dividend 20%. In March of 1974, Wal-Mart declared its first cash dividend of $0.05 per share. The dividend has been increased every year since the first payment. The chart below paints a splendid picture of the steady dividend increases since 1980.
Valuation: The results of the earnings and dividend increases over the last ten years produced a dramatic effect on valuation. The current yield has grown from a 0.3% in 2000 to today's 2.75%. The PE has declined from a high over 55 to the present 12.2. Current valuation does not signal a bottom in prices, rather it offers the investor a low risk price opportunity.
Technical Story: Over the near term the shares of Wal-Mart will be largely dictated by the path of the stock market. The long term trend is obviously neutral. A technical objective, which is the width of the trading range added to the top of the range, projects a minimum target in the 75-80 area.
Summary & Conclusion: For those dividend investors willing to accept a current yield a tad less than 3% then these shares represent a rare value. The sideways trading range, accompanied by the large increase in earnings and dividends, reduced valuation levels to historic lows. Though I am personally not long Wal-Mart, I am eager to add some to my portfolio on any dips below $50.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WMT over the next 72 hours.