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Walmart Stock is a ‘Dividend Aristocrat’ Worth Watching

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Wal-Mart Stores, Inc. (NYSE: WMT ) is a discount retail heavyweight that is also a dividend aristocrat.

The dividend aristocrats are a select group of 51 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.

Wal-Mart's first dividend was $0.05 per share, paid in 1974. It has increased its dividend each year since, and now pays a quarterly dividend of $0.51 per share.

Wal-Mart is one of 350 dividend-paying stocks in the consumer staples sector. You can see the full list of all 350 consumer staples dividend stocks here .

2017 has been a very difficult year for many retailers. The threat of e-commerce, led by Internet retail giant Amazon Inc. (NASDAQ: AMZN ), has blown a huge hole in retailers, particularly those with a large brick-and-mortar presence.

However, Wal-Mart has fared very well this year. The stock is up 40% year-to-date, as Wal-Mart has proven it is the best-equipped retail to compete with Amazon.

WMT Stock Overview

The first Wal-Mart store opened in 1962 in Rogers, Arkansas. It was founded by Sam Walton, who started the business with a simple vision: to offer the lowest prices. This philosophy led to Wal-Mart's huge growth over the years.

Wal-Mart went public in 1972. At that time, it had 51 stores, and annual sales of $78 million.

Today, Wal-Mart generates annual sales of $485 billion. It operates over 11,600 stores, located in 28 countries around the world.

Source: 2017 Factbook, page 5

The Wal-Mart U.S. segment includes retail stores in all 50 U.S. states, Washington D.C., and Puerto Rico. It also includes Wal-Mart's digital business. Walmart International consists of operations in 27 countries outside of the U.S.

Lastly, Sam's Club consists of membership-only warehouse clubs and operates in 48 states in the U.S. and in Puerto Rico.

Wal-Mart's earnings-per-share declined 4% in fiscal 2017, as the company accelerated its strategic growth investments. The good news is, these investments have provided the company with a return to growth.

Wal-Mart Growth Prospects

Wal-Mart's total sales increased 4.2% last quarter , to $123 billion. Comparable U.S. sales increased 2.7%, thanks to a 1.5% increase in traffic. U.S. e-commerce sales soared 50% for the quarter.

Wal-Mart's resurgence is due mostly to its e-commerce investments. E-commerce sales reached $15 billion last fiscal year, and have continued to grow at a high rate each quarter.

Wal-Mart has also made a number of acquisitions to accelerate its e-commerce growth, including the $3.3 billion purchase of Jet.com. It also has an investment stake in Chinese e-commerce site JD.com (NASDAQ: JD )

Another growth catalyst for Wal-Mart is international growth. The company expects to open 255 new international stores each year in 2018 and 2019. By contrast, Wal-Mart will open fewer than 15 Supercenters in the U.S. next year.

New international store openings will be focused on Mexico and China, which are major growth opportunities for Wal-Mart. Both countries have large consumer classes, and high economic growth. For example, last quarter Walmex grew comparable sales by 7%, while sales increased 4% in China.

For fiscal 2018, Wal-Mart expects adjusted earnings-per-share of $4.38 to $4.46. This would represent a growth rate of 1.4% to 3.2% from the previous fiscal year. This should allow Wal-Mart to continue increasing its dividend.

Competitive Advantages for Walmart Stock

Wal-Mart's main competitive advantage is its massive scale. A Wal-Mart store is located within 10 miles of approximately 90% of the U.S. population.

Its distribution efficiencies allow Wal-Mart to keep transportation costs low. It can pass on these savings to customers through everyday low prices.

Wal-Mart retains its brand strength through advertising. Because of its immense financial resources, Wal-Mart can afford to spend heavily on advertising:

  • 2015 advertising expense of $2.4 billion
  • 2016 advertising expense of $2.5 billion
  • 2017 advertising expense of $2.9 billion

Wal-Mart's competitive advantage, in addition to being the low-cost leader in the discount retail space, provides the company with steady profitability. This is true, even during recessions.

Wal-Mart performed phenomenally well during the Great Recession. The company steadily grew earnings-per-share each year in that time.

  • 2007 earnings-per-share of $3.16
  • 2008 earnings-per-share of $3.42 (8.2% increase)
  • 2009 earnings-per-share of $3.66 (7% increase)
  • 2010 earnings-per-share of $4.07 (11% increase)

This was a very impressive performance, in one of the worst recessions in decades. Wal-Mart's growth indicates the company might actually benefit from recessions.

As the low-cost leader in retail, Wal-Mart conceivably sees higher traffic during economic downturns, as consumers scale down from higher-priced retailers.

Valuation & Expected Returns

Wal-Mart management is expecting the company to report adjusted earnings-per-share of $4.38 to $4.46 for 2017. At the midpoint of guidance for the full year, the stock has a price-to-earnings ratio of approximately 21.8.

Source: Value Line

As you can see, Wal-Mart's current valuation stands well above its historical levels. In the past 10 years, the stock held an average price-to-earnings ratio of 14.6. Wal-Mart is currently valued roughly 50% above its 10-year average.

The stock has not held a price-to-earnings ratio above 22, since 2004. A prolonged period of multiple contraction soon followed, with Wal-Mart's price-to-earnings ratio spending most of the past 10 years in the mid-teens.

Aside from its valuation multiple, Wal-Mart will generate returns from earnings growth and dividends. A projection of expected returns is below:

  • 2%-3% sales growth
  • 2%-3% share repurchases
  • 2% dividend yield

In this scenario, total returns would reach approximately 6%-8% per year. However, a contracting price-to-earnings ratio would negatively impact total returns. If Wal-Mart returned to its average valuation over the past 10 years, the stock would decline by approximately 33%.

As a result, Wal-Mart appears to be overvalued.

Final Thoughts on Walmart

Heading into 2017, Wal-Mart had struggled through a lengthy turnaround. But the company made big strides this year, particularly in e-commerce. This has allowed it to compete much more effectively with Amazon, than most other retailers.

Not surprisingly, Wal-Mart stock has been a standout performer among retailers. While this has rewarded the investors who were patient enough to hold on through the turnaround, the downside of Wal-Mart's impressive rally is that it no longer appears attractive as an investment.

That said, Wal-Mart should continue to generate steady earnings growth, and raise its dividend modestly each year. This makes it a quality hold for dividend growth investors.

Please send any feedback, corrections, or questions to ben@suredividend.com.

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The post Walmart Stock is a 'Dividend Aristocrat' Worth Watching appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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