Seeking Alpha
Long/short equity, research analyst
Profile| Send Message|
( followers)  

Wal-Mart Stores, Inc. (NYSE:WMT) shares have returned investors 31.20% over the past 12 months. The stellar performance reflects WMT's defensive nature amid overall equity market weakness as the company operates a discount-retailing model. I am very bullish on WMT as a solid dividend play based on the following three compelling reasons:

1) WMT's valuations provide investors a solid margin of safety. Consensus estimates predict revenues, EBITDA, and EPS to grow at a 2-year CAGR of 5.0%, 5.0%, and 8.7%, respectively. Accounting for these, the stock trades at 1.4x PEG, which is fairly in line with its peer average at 1.3x (see below).

At $69.72 per share, WMT is trading at 7.8x the NTM EBITDA and 14.0x the NTM EPS. Compared with the peer average financial performance (see below), WMT underperforms in the growth measures, but has a solid profitability and a healthy liquidity position. Given the company's largest worldwide network of retail stores and significant presence in emerging markets, WMT should deserve a valuation premium relative to its peers.

However, the valuation model shown below actually requires a 23.8% discount on both the peer average P/E and EV/EBITDA multiples to justify the current price of $69.72, suggesting the market is likely not giving enough credits to the firm's financial excellence or over-discounting the slower growth prospects.

Click to enlarge

2) The consensus estimated revenues, EBITDA, and EPS have demonstrated a solid trend, with most estimates having sizable upward revisions over the past 12-18 months.

3) The dividend paid and stock repurchase are likely sustainable. The table below shows a substantial improvement in WMT's free cash flow over the past 10 fiscal years. Dividend paid has been gradually increasing and the company tends to spend the rest of free cash flow in buying back stocks. These shareholder-friendly policies provide investors an additional margin of safety.

Bottom line: In the light of attractive valuations, solid earnings growth potential, and sustainable dividends as well as stock buybacks, I strongly recommend dividend investors acquire WMT shares at the current price.

Comparable analysis table and free cash flow chart are created by author, consensus estimates table is sourced from Capital IQ, and financial data is sourced from Morningstar and Capital IQ.

Source: Time To Buy Wal-Mart For 3 Reasons