Updated on April 9th, 2021 by Bob Ciura
The Dividend Aristocrats are a select group of 65 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. We believe the Dividend Aristocrats are among the best dividend stocks to buy-and-hold for the long term.
Retail heavyweight Walmart Inc. (WMT) is one of the better-known Dividend Aristocrats. It is widely recognized, not just for its strong brand and industry dominance, but also for its long dividend history.
You can see a full downloadable spreadsheet of all 65 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios and dividend yields, by clicking on the link below:
Walmart’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 $0.55 per share. Walmart has increased its dividend for 48 consecutive years.
Recent years have been difficult for many retailers. The threat of Internet retail competition, led by Amazon (AMZN), as well as the impact of the coronavirus pandemic last year, has had a negative impact on many retailers.
However, Walmart has fared very well in recent years by adapting to the changing environment. It has invested heavily in its own e-commerce platform, and the stock has generated strong returns for shareholders. Walmart, as opposed to many other retailers, has proven it is one of the best-equipped to compete with Amazon.
The first Walmart 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 Walmart’s huge growth over the years. Walmart went public in 1972. At that time, it had 51 stores, and annual sales of $78 million.
Today, Walmart generates annual sales of more than $550 billion. It operates more than 10,000 stores, that serve nearly 230 million customers worldwide each week.
Source: Investor Presentation
Walmart has also expanded into a variety of different services, making it a true conglomerate. The Walmart U.S. segment includes retail stores in all 50 U.S. states, Washington D.C., and Puerto Rico. It also includes Walmart’s digital business. Walmart International consists of operations in 25 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.
As previously mentioned, Walmart performed very well last year. Walmart reported fourth quarter and full year earnings on February 18th, 2021. Revenue was up a very impressive 7.3% to $152 billion during the quarter, driven by continued pandemic–fueled changes in consumer behaviors. Total comparable sales soared 8.5% in Q4, easily beating expectations. Walmart US, the largest segment, was up 8.6%, while Sam’s Club saw a staggering 10.8% gain ex–fuel.
Revenue by segment is as follows: Walmart US +7.9% to $100 billion, International +5.5% to $35 billion, Sam’s Club +8.1% to $16.5 billion. Walmart US e-commerce revenue was up 69%, and Sam’s club e-commerce revenue was up 42%. Gross margins remained very low at 23.7% of revenue, but that was up 30bps from the year–ago period. The company said COVID–related costs were $1.1 billion in Q4, and that adjusted earnings–per–share came to $1.39 in Q4.
The company guided for net sales, operating income, and earnings–per–share to decline this year, primarily due to anticipated divestitures. Without divestitures, Walmart expects low–single digit growth in earnings–per–share. Our initial estimate is for $5.50 in earnings–per–share, which would be essentially flat year–over–year.
Walmart also raised its dividend by a penny per share per quarter, rising 1.9% to a new annualized payout of $2.20 per share. This is also Walmart’s 48thconsecutive year of dividend increases as it closes in on Dividend King status.It also approved a new $20 billion share repurchase program. We currently forecast Walmart to grow its earnings-per-share by 5% per year over the next five years.
Competitive Advantages & Recession Performance
Walmart’s main competitive advantage is its massive scale. Its distribution efficiencies allow Walmart to keep transportation costs low. It can pass on these savings to customers through everyday low prices.
Walmart retains its brand strength through advertising. Because of its immense financial resources, Walmart can afford to spend billions each year on advertising.
Walmart’s competitive advantage also provides the company with steady profitability. This is true, even during recessions. The company performed phenomenally well during the Great Recession.
It 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. The company continued to generate strong results last year, when the U.S. economy entered recession due to the coronavirus pandemic.
Walmart’s growth indicates the company might actually benefit from recessions. As the low-cost leader in retail, Walmart conceivably sees higher traffic during economic downturns, when consumers scale down from higher-priced retailers.
Valuation & Expected Returns
Walmart shares currently trade at a price of ~$140. Using our earnings-per-share estimate of $5.50 for the current fiscal year, the stock has a price-to-earnings ratio of 25.4. This is well above the stock’s historical valuation. The current valuation is at a 10-year high.
We currently view a P/E ratio of 22 as fair value for Walmart stock. Investors should also note that retailers have typically not held P/E multiples above 20. If shares were to revert to our fair value estimate by fiscal 2026, annual returns would be reduced by 2.8% over this period of time.
Walmart shares have performed very well for an extended period. While this has rewarded shareholders with strong returns, it makes the stock fairly unattractive today. We view Walmart as an overvalued stock right now.
Aside from changes in the P/E multiple multiple, Walmart should generate returns from earnings growth and dividends. A projection of expected returns is below:
- 5.0% earnings-per-share growth
- 1.6% dividend yield
- -2.8% multiple reversion
In this scenario, Walmart is projected to generate a total return of just 3.8% per year over the next five years. Shares of Walmart are significantly overvalued compared to its history, and we believe this will weigh on the stock’s future returns.
While many retailers have struggled with adapting to the change in commerce shopping habits, Walmart has made the proper strategic investments in our view. The company’s impressive e-commerce growth is reflective of this view.
The company has performed well and the stock has outperformed the S&P 500 Index in the past five years. We find the company’s dividend track record to be impressive, even if the most recent dividend hikes were on the small side.
However, sometimes a great company can be a poor investment, if too high a valuation is placed on a stock. We feel this is the case with Walmart today. Despite its strong business model and growth potential, the stock appears to be significantly overvalued.
The extended rise in share price has absorbed much of the stock’s potential total return, implying that the next five years will result in weak returns to shareholders. We recommend investors looking to purchase shares of Walmart do so after a meaningful pullback.