Walmart: The Lord Of Retail Holds Firm

Love it or hate it, Wal-Mart Stores Inc (NYSE: WMT) is the lord of the traditional retail fiefdom. True, this is the age of e-commerce and brick-and-mortar retailers constantly live in fear of what new scheme Amazon.com (NASDAQ: AMZN) will hatch. But if any can hope to give the online shopping giant a run for its money, you could say it’s Walmart.

Why would it have better chances than other retailers against Amazon? Well, everything about Walmart is epic in scale. It dwarfs the competition in terms of physical presence and workforce. This is the biggest retailer on the planet! It has the financial means to invest in technology and growth initiatives that keep it competitive.

Walmart’s sheer size and industry clout won’t necessarily impress income investors. They may find some comfort in that since it speaks of resilience, competent management, steady growth, and financial strength. However, prospective buyers into the company will want to know more. For example, how shareholder-friendly is it? What lies ahead for the business in the e-commerce age? Can they count on sustained dividend increases? These are questions we will try to answer in the text below.

The birth and growth story of Walmart

Walmart
Walmart

This retail empire was born on July 2, 1962 with a single discount store. Sam Walton started the business in Rogers, Arkansas. His plan for growth relied on “selling more for less” and prioritizing customer service.

The success of the new company took even Walton by surprise. He launched a national expansion in the 1970s and took the company public. Walmart sold its first stock at $16.50 per share and listed on the NYSE in 1972. That year, the company had 51 stores and sales of $78 million.

Sam’s Club and Walmart Supercenter opened in the 1980s. They combined the supermarket concept with general merchandise sales, making it more convenient for people to shop.

By 1990, Walmart had become the top retailer in the US. It began its international expansion in 1991 through a joint venture with Mexican retailer Cifra.

Present-day Walmart

Nowadays, Walmart is the world’s biggest retailer. It operates 11,695 stores under 59 banners in 28 countries. Its stores serve more than 260 million customers every week. The company also has e-commerce operations in 11 countries. Barring the US government, Walmart is the biggest employer in its home country. It has 1.5 million workers in the US. Worldwide, the company provides work to about 2.3 million people.

Walmart has snatched the top spot on the latest Fortune 500 list. But this is not a novel development. In fact, it is the fifth year in a row that the company has topped the ranking. It has been number one 13 times. Walmart first made the list in 1995, when its market cap was $58.9 billion. The figure now stands at $230 billion.

Walmart, which is based in Bentonville, Arkansas, exited its last fiscal year with revenues of $485.9 billion. It booked profits of $13.6 billion and reported assets of $198.8 billion.

The dividend story

Walmart declared its first dividend in 1974. The annual distribution has been growing ever since. This makes the company one of the most dedicated dividend payers in corporate America.

Stockholders are currently collecting $0.51 per share by way of a quarterly dividend. The yield is 2.7%, higher than both the industry median and the company’s historic median.

In the first quarter of fiscal 2018, Walmart generated $5.4 billion in operating cash flow. It returned $3.7 billion of it to shareholders through dividends and stock repurchases.

Inside the Walmart fortress

So, why should dividend investors place their trust in Walmart? After all, the market doesn’t seem to think much of traditional retailers. Look at what happened in June, when Amazon said it had agreed to pay about $13.7 billion for upscale grocer Whole Foods Market (NASDAQ: WFM). Retail stocks immediately took a beating, Walmart being no exception.

While Amazon is a threat retailers must consider, not all are equally vulnerable. Walmart is arguably the best shielded traditional retailer, largely due to its dazzling scale. Manufacturers are vying for its shelves and the size of its orders makes Walmart the one with the bargaining power. This also allows the retail behemoth to keep prices lower and grow its market share by stealing customers from rival operators.

In addition, Walmart is investing heavily in its digital business in response to shifting consumer preferences. It has also made investments in some grocery categories (meat and produce), as well as the floral and pharmacy segments. It appears that Walmart has spent some of its money well as the investments are starting to pay off.

We should mention here that this is a company with many vocal critics. It has been involved in a myriad of labor-related lawsuits. Walmart has drawn fire for its low wages, poor working conditions, inadequate health care, and strong anti-union policies. However, it has been working steadily over the past decade to improve its image. Its efforts are bearing fruit, as indicated by its improved ranking in some corporate indices.

Valuation

With 44 years of uninterrupted dividend growth, Walmart certainly deserves the attention of income investors. They can even snatch some of its stock at a quite reasonable valuation.

In terms of share price alone, it may not appear like a very good time to buy. Over the past year, the stock has traded in the range of $65.28 to $80.47. At this very moment, the share price is $75.94.

On the other hand, Walmart sports an earnings multiple of 17.2 against an industry median of 20.2. On a forward basis, the ratio is 17.5, in line with the industry median, according to GuruFocus data.

For investors who lean towards buying but don’t much care for the current share price, maybe a few words from Goldman Sachs (NYSE: GS) could tip the scales. The Wall Street giant has faith in Walmart, as revealed in a research note last week. Without closing his eyes to certain challenges, Goldman analyst Matthew Fassler believes the retailer has what it takes to withstand the e-commerce onslaught. The investment bank upgraded it to “buy” and hiked its price target to $84.

Disclosure:

I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.

This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.

 

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