Those who are looking for a conservative investment, but still want some stock exposure to keep up with rising expenses, such as property taxes, gasoline costs, food prices, etc., should consider Wal-Mart Stores, Inc. (NYSE:WMT). Wal-Mart is a low beta stock - which means that it has low volatility compared to the market. Wal-Mart has a beta of 0.41, while the overall market has a beta of 1. Therefore, Wal-Mart's stock price fluctuates less dramatically than the market itself. This is comforting to shareholders who don't want to see their stock charts look more like seismograph readings during an earthquake.
Wal-Mart is currently fairly valued with a forward PE ratio of 13.44, a PEG of 1.82, and a price to book ratio of 3.67. This fair valuation is due to the consistency of the company's revenue and earnings. Investors know what to expect and there are usually not that many negative surprises. Although I see the company as fairly valued, I do think the stock is due for a pullback after the recent price rise.
The company pays a solid dividend of 2.1%. Wal-Mart is a dividend champion that has raised its dividend every year since 1974. That's the consistency that investors can count on in good times and bad.
Some may not be all that impressed with a 2.1% yield, but that can be enhanced with a covered call strategy. Since Wal-Mart's stock recently had a nice run-up from $60 to over $70, now looks like a wise time to sell a call option against each 100 shares owned. This is a conservative strategy that hedges your position and allows investors to collect some extra cash. Consider selling the out of money September $72.50 call. Selling this call will provide you with an approximate $100 credit to your account. This can be done multiple times per year to add to the dividend payouts and keep you hedged when the stock looks overbought. Consider selling the calls about one month out as time decay accelerates, increasing the chance of the option expiring worthless - which is what we want.
The company reported same-store sales growth of 2.2% and an increase in EPS of 8.3% for Q2 FY13. EPS results were $1.18, which was the top of the expected $1.13 to $1.18 range. So, the company is continuing to perform well, but the stock may have gotten a bit ahead of itself as it rose over 20% in the past few months.
Wal-Mart is expected to grow earnings annually at 8.3% for the next five years, so the recent 20% rise in the stock does look like it went too far, too fast. The stock tends to follow earnings growth over time, so this reinforces the prospects of a short-term pullback in the stock.
I am bullish long-term on the stock, so if you currently own it, consider the covered call strategy. For those who don't own the stock, they may want to consider waiting for a better entry point or do a buy-write. The buy-write strategy involves buying the underlying shares and simultaneously selling a call for every 100 shares bought. This will give you an instant hedge to protect you from any downside price action.