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Since I live in the city I'm not able to go to Wal-mart (NYSE:WMT) to do my shopping very often. Of course there are several in the surrounding metropolitan area so I get the opportunity from time-to-time. Honestly I don't like the idea of going to them because the store is always crowded (no matter what time it is) but once I'm inside I'm amazed at the time and money I end up spending. I don't think I've ever come out of a Wal-mart store with only what I went there looking for. When something like that happens you know it's a good business and one that should be around for a very long time. I had this realization a few years back and was lucky enough to purchase shares of Wal-mart for under $50 / share. Let's take a look and see if the company still rates as a good dividend growth buy today:

Company Description: Wal-mart (WMT) is the largest retailer in the world operating a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets. It operates stores in the United States and Puerto Rico, as well as in Argentina, Brazil, Canada, Chile, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, the United Kingdom, China, and India.

Dividend Reliability A stock's dividend reliability is determined by its dividend payment history as well as its current financial health. Total of four points available.

  1. The number of Consecutive Dividend Payments - The longer a company has been paying a dividend, the more ingrained the dividend payment is part of the company culture and the less likely it would be removed. (10 to 30 Years = 1 Point More than 30 Years = 2 Points)
  • WMT has paid a dividend since 1974. 2 Points
  1. Cash Flow Payout Ratio - The percentage of free cash flow that is paid out as dividends. (Less than 60% = 1 Point)
  • Cash flow payout ratio = 43%. 1 Point
  1. Debt to Total Capital - Too much debt can hinder dividend growth as cash is going to debt and interest payments. Total capital is a combination of debt and shareholders equity. (Less than 45% = 1 Point)
  • Debt to total capital = 35%. 1 Point

Dividend Growth A stock needs to be growing its dividend on an annual basis. The growth of its dividend should be at a respectable rate, especially if the current yield is low. Total of four points available.

  1. Number of Consecutive Dividend Increases - The longer a company has been consistently raising a dividend, the more ingrained the dividend increase is part of the company culture and the less likely it would be changed. (10 to 20 Years = 1 Point More than 20 Years = 2 Points)
  • WMT years of dividend growth = 37 years. 2 Points
  1. 1 Year Cash Flow Payout Ratio <= Avg 5 Year - A cash flow payout ratio that is going up tells us that dividend payments are eating into the company's bottom line. This could signify a slowdown in dividend growth in the future or a slowdown in the companies earnings. Ideally we'd like the ratio to be less than or equal to the average 5 year payout ratio. (1 year cash flow ratio <= Avg 5 year = 1 Point)
  • [1 Year = 43%] > [Avg 5 Year = 42%] 0 Points
  1. 1 Year Dividend Growth Rate > Avg 5 Year - If the 1 year dividend growth rate is higher than the average 5 year, then we know the dividend growth is accelerating. (1 year dividend growth rate > Avg 5 year = 1 Point)
  • [1 Year Growth = 20.5%] > [Avg 5 Year = 13.6%] 1 Point

Fair Value If we're going to buy a stock, we don't want to purchase it went its overvalued. Total of 2 points available

  1. Current P/E < Avg 5 Year P/E - If the current P/E (price divided by earnings) is less than its average 5 year P/E, then we are getting the stock cheaper today than in the past. (Current P/E < Avg 5 Year P/E = 1 Point)
  • [Current P/E = 13.3 ] < [Avg 5 Year P/E = 14.9] 1 Point
  1. PEG < 1.5 - The PEG ratio (Price/Earnings To Growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (NYSEARCA:EPS), and the company's expected growth. The lower the ratio the better. (PEG < 1.5 = 1 Point)
  • PEG = 1.4 1 Point

Strengths - WMT's size is unrivaled which allows it to have vast supplier connections, strong purchasing and pricing power, and unmatched operational effectiveness. It is a wide provider of merchandise and has proven to be successful during rough economic times.

Weaknesses - Low wages and benefits for a large portion of its employees makes it difficult for them to retain higher quality talent. WMT has been slow to react to changes in the market in the past. It tends to sell a lower quality of product vs its competitors.

Opportunities - Online retail sales growth is still an opportunity to the company. International presence and expansion likely poses the greatest growth prospect for WMT. Smaller, consumer focused stores may allow them to enter larger metropolitan areas that their size has prevented in the past.

Threats - Target (NYSE:TGT) poses the biggest threat to WMT's brick-and-mortar presence. Amazon (NASDAQ:AMZN) is a major threat with its dominant online sales. WMT's reliance on Chinese imports could affect its bottom line as the Chinese Yuan's rise vs the dollar would drive costs up. WMT is continually defending themselves against opposition groups in various communities it does business or wants to do business.

Conclusion - WMT scored 4 points in dividend reliability, 3 points in dividend growth, and 2 points in fair value for a final score of 9/10 points which rates it as a Very Strong dividend growth stock.

Some investors in WMT like to mention the "lost decade" where one could have bought WMT for the same price 10 years ago as they can today. Granted this is true, but paying near $60 / share 10 years ago was a foolish valuation at that time. In the past 10 years WMT has significantly increased profit, bought back millions of its shares, and (most importantly to me) increased its dividend over 400%. Based on the data above I believe we are likely to see continued double digit dividend growth from WMT. Although its recent price increase has deflated the dividend yield some (2.5%), WMT is still a solid buy at its current valuation and I believe this presents a good time to initiate a long-term dividend growth position.

Source: Wal-Mart Dividend Growth Stock Analysis