Has anybody NOT been in a Wal Mart store?
From Yahoo Finance:
Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam’s Club, and International. The International segment includes various formats of retail stores and restaurants, including discount stores, supercenters, and Sam’s Clubs that operate in Argentina, Brazil, Canada, the People’s Republic of China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, and the United Kingdom.
This is a large cap stock with a market capitalization of $197B and over 1,900,000 employees! Holy jumping! That is a lot of people.
Right off the bat, let me tell you that things look good.
Starting with the return on invested capital, management has done an excellent job of maintaining their 5 year average ROIC of 13.40%. No major fluctuations. Straight and steady as she goes.
The return on equity numbers show average ROE of 20% over the 10 year period. The discrepancy? Wal Mart is successfully using debt. Total debt is 41% of capital. Management has used this debt effectively to increase their returns.
Equity growth rate has been steady. The 9 year average is 15.10%, the 5 year average is 13.37%, the 3 year average is 13.34% and last year’s growth rate was 16.76%. All in all, pretty consistent equity growth.
Earnings per share growth rate has been on the decline over the 10 year period. The 9 year average is 15.10%, the 5 year average is 14.23%, the 3 year average is 12.40%, and last year’s EPS growth rate was 9.02%. As you can see, a slow and steady decline.
Sales growth rate has been consistent at just around 10% over the 10 year period. No real decline showing up in sales.
Current yield for WMT is a standard 1.84%. That is inline with the S&P 500 dividend yield although it is below the DJIA dividend yield of 2.25%.
Wal Mart has had a stellar dividend growth rate over these 10 years. The 9 year average is 19.91%, the 5 year average is 21.48%, the 3 year average is an even better 22.22%. But the ride ends there, and the last 2 years have had growth rates of 13.51% and 11.67% respectively. Still respectable. But this makes sense when you look at the fundamentals.
The interesting part is Wal Mart’s low dividend payout ratio. The ratio is currently 23.10%. That is quite low for a steady dividend payer. That means that Wal Mart has lots of room to increase their dividends in the future. I love to see a dividend yielding company with this type of flexibility. As the growth slows down, that payout ratio will start to increase and keep our dividends growing at a healthy pace.
So far, everything looks good. Let’s check our different valuation models.
Looking at the historical dividend yields, the 10 year average is 0.92% and the 5 year average is 1.10%. The current dividend yield of 1.84% is a Wal Mart record! Maybe this is where we see the growth company being converted into the dividend paying company.
Obviously, since we are at record dividend yields, this stock is going to be ‘on sale.’ Using the 1.10% as the average high dividend yield an investor can expect to get, the model price for WMT is $80. At a current price of $47.83, this stock is selling at a discount of 40%!
Calculating the Graham number, we have a current EPS of $2.95 and a current book value per share of $14.91. That gives us a Graham number of $31.45. That would imply a premium of 52% to today’s current price.
Using our discounted present value, I used the analysts’ estimate of future EPS growth rate of 13% (which is perfectly in line with my initial guess of 13.37% from the 5 year average equity growth rate) and the current P/E of 16.21. You can see that the P/E has been dropping steadily from the 10 year average of 28.11 to today’s low of 16.21. Investors are not expecting the growth rates that Wal Mart used to produce.
With this data, the model price would be $40.13. That would imply a premium of 19% over today’s price.
See all my calculations here.
Wal Mart looks like a great addition to building a superior dividend yielding portfolio. The fundamentals look great. The dividend yield is at an all time high while the P/E is at an all time low.
Do your own research, and let me know what you think.
WMT 1-yr chart:
Disclosure: I do not own any shares of WMT.