Wal-Mart Will Make Up For Its Lost Decade

| About: Wal-Mart Stores, (WMT)

In the 1990s, Wal-Mart's shareholders saw their investment balloon tenfold. After this spectacular performance, shares have been flat between 2000 and 2010, and investors were completely dependent on dividends to obtain any kind of return.

Recently the stock has advanced again, trading near the upside of the $45-$60 range. While the market seems slightly disappointed by its latest earnings release, this may be the time to anticipate the long-awaited breakthrough from the upside of its trading range.

Attractive Valuation

While the stock has been unchanged, the valuation has become more attractive every year. Wal-Mart consistently reported low-single-digit revenue growth which, in combination with margin expansion, delivered a steady increase in net income.

With problematic global expansion plans in the past, management used the excess free cash flows wisely, steadily repurchasing its own shares.

As such, the modest growth figures resulted in a steep increase in its profitability. Over the period between 2008 and 2011, revenues increased 3% per annum, net margins increased from 3.3 to 3.9%, and profits were up 29% to $16.4 billion. Earnings per share and dividend growth were even higher, as the company returned some $50 billion in cash by repurchasing shares and increasing its dividend.

Looking Ahead

If Mr. Duke can run the company as efficiently as he has over the last 5 years, the future looks bright. Free cash flows for the period 2012-2015 should be well over $50 billion, and the company has demonstrated its willingness to return the cash to its shareholders.

Assuming the company will increase dividends steadily, there should be room for easily another $30 billion in repurchases (Wal-Mart repurchased $32 billion between 2008and 2011). As such, the numbers of outstanding shares should be reduced to 3 billion in 2015. Combining this with a steady increase in net revenues and slight margin expansion, the company is on track to earn over $20 billion in 2015, or about $6.5 to $7 a share.

When the market starts to appreciate the operational efforts, as well as the shareholder-friendly financial policy, the next decade has enough potential to make up for this lost one.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.