Wal-Mart (WMT) has increased its dividend every year since the first declared dividend in March 1974. Furthermore, the compounded annual growth rate of the dividend was almost 20% over the past decade. So clearly Wal-Mart has been a consistent dividend growth stock for years.
Below are Wal-Mart's historical dividends and growth rates for the past 10 years:
Wal-Mart has been able to grow its free cash flow per share at an impressive rate over the same time period. In fact, the company was able to increase FCF per share every year, including 2008 and 2009, throughout the entire past decade. And over the past 5 years, Wal-Mart's FCF/share grew at ~9.5% compounded average growth rate.
Furthermore, the payout ratio has remained extremely low, even with Wal-Mart's strong dividend growth. Despite a steadily increasing trend, the payout ratio is still at an extremely low 21%. Between its low payout ratio and strong cash flow, Wal-Mart should be able to continue to reward shareholders with good dividend growth going forward.
|Year||FCF/Share||Payout Ratio (Div/FCF per share)|
Considering the consistency of Wal-Mart's dividend and FCF growth, and the attractiveness that the stock may hold for income-oriented investors, a dividend discount model is one potentially helpful way to value the company.
Dividend Discount Model
In performing this valuation, I made several assumptions. First, I used 9% as my discount rate, based on the long-term average return of the stock market. Second, I used Wal-Mart's 9% dividend increase to set the dividend for 2012 ($1.59/share). I used a constant growth rate of 15% for years 2013-17, a 12% growth rate for 2018-20, and a 10% growth rate for 2021-22. Finally, I assumed a 5% perpetuity rate after 2022.
Based on these assumptions, I calculated that Wal-Mart's intrinsic value is $80.80 per share. At the current price of $68.22, the stock is ~16% below its intrinsic value and provides some margin of safety.
Additionally, the current price assumes a constant growth rate of ~6.7% for the stock's dividend. I believe this is too low given Wal-Mart's consistent dividend growth, free cash flow and extremely low payout ratio. Therefore, long-term, income-oriented investors may want to give Wal-Mart a closer look to see if it should be included in their portfolio.