Updated on February 21st, 2019 by Nathan Parsh
The Dividend Aristocrats are a select group of 57 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
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.
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 $0.53 per share. Walmart has increased its dividend by a rate of almost 8% over the past decade.
And yet, the company’s dividend still appears very safe. We explore Walmart’s dividend safety in the follow video:
Recent years have been difficult for many retailers. The threat of Internet retail competition, led by Amazon (AMZN), has blown a huge hole in retailers with a large brick-and-mortar store count.
However, Walmart has fared very well in recent years. The stock is up more than 6%year-to-date, and is up more than 32% over the past two years.
Walmart, as opposed to many other retailers, has proven it is the best-equipped retail 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 $514 billion. It operates almost 11,700 stores, located in 28 countries around the world.
Walmart has also expanded into a variety of different services, making it a true conglomerate.
Source: Investor Presentation
The Walmart 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.
Walmart’s earnings-per-share increased 4% in fiscal 2019, due to higher than expected same-store sales. The company’s investments in e-commerce are really paying off. Given the company’s results and guidance for fiscal 2020, Walmart should see continued growth for years to come.
Walmart’s total sales increased 1.9% in the fourth quarter, to $138.8 billion. Sales for fiscal 2019 improved 2.8% to $514.4 billion. Excluding currency, sales were higher by 3.1% for the quarter and 3% for the year.
Comparable sales increased 4.2% during the quarter, well above estimates of 3.3%. Store traffic improved 0.9% while the average ticket was higher by 3.3%. E-commerce sales rose 21% worldwide for the year, with 43% growth in the U.S.
For fiscal 2019, U.S. same-store sales increased 3.6%. Walmart offers grocery pickup at more than 2,100 stores while providing delivery services at more than 800 locations.
Source: Investor Presentation
These services were credited with a portion of same-store sales gains. The company plans to add grocery pickup at another 1,000 stores this year while doubling the amount of locations offering delivery.
Walmart’s resurgence is due mostly to its e-commerce investments. E-commerce sales reached $16 billion last fiscal year, and have continued to grow at a high rate each quarter.
Walmart 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.
In late August of last year, Walmart announced that it had completed its $16 billion investment in Flipkart, a leading online shopping company in India. With this investment, Walmart has taken a 77% stake in one of the most popular e-commerce companies in the second most populace country on earth.
Overall, Walmart’s multiple investments in e-commerce are the reasons why this emerging category will contribute most of the company’s growth going forward.
Source: Investor Presentation
Another growth catalyst for Walmart is international growth. The company expects to add more than 300 new international stores during the current fiscal year, primarily in China. By contrast, Walmart will open fewer than 10 Supercenters in the U.S. over that same time.
New international store openings will be focused on Mexico and China, which are major growth opportunities for Walmart. Both countries have large consumer classes. Last quarter Walmex grew comparable sales by 3.8%, while sales decreased 0.2% in China.
The calendar shift of the Mid-Autumn Festival and increased competition factored into the decline in comparable sales. A slowing economy in China also impacted results. Long term, management feels that China will be a sizable source of growth for the company.
The company expects earnings-per-share for fiscal 2020 to decline by a low single digit percentage from fiscal 2019 from an increase in the expected tax rate and share dilution due to the Flipkart acquisition.
Walmart will also reinvest $11 billion in store remodels, customer initiatives, e-commerce and other areas to improve the customer experience.
Net sales are expected to grow 3% in constant currency. Walmart expects U.S. same-store-sales to range from 2.5% to 3% growth with e-commerce sales increasing 35%. Walmart international sales should be higher at 5% in constant currency.
While the company hasn’t given specific guidance for earnings-per-share, we believe the company will earn $4.84 per share in fiscal 2020.
We expect that Walmart can grow earnings-per-share at an annual rate of 5.5% through 2024 due to a combination of same-store-sales and e-commerce growth.
Competitive Advantages & Recession Performance
Walmart’s main competitive advantage is its massive scale. A Walmart store is located within 10 miles of approximately 90% of the U.S. population.
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, 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
- 2018 advertising expense of $3.1 billion
Walmart’s competitive advantage provides the company with steady profitability. This is true, even during recessions.
Walmart 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. 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 almost $100. Using our earnings-per-share estimate of $4.84 for the current fiscal year, the stock has a price-to-earnings ratio of 20.7. This is well above the stock’s ten-year average price-to-earnings ratio of 15.
As you can see, Walmart’s current valuation stands well above its historical levels. If shares were to revert to their historical average by 2024, annual returns would be reduced by 6.7% 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.
The stock has not held an average price-to-earnings ratio above 20, since the middle of the last decade. A prolonged period of multiple contraction soon followed, with Walmart’s price-to-earnings ratio spending most of the past 10 years in the mid-teens.
Aside from its valuation multiple, Walmart will generate returns from earnings growth and dividends. A projection of expected returns is below:
- 5.5% earnings-per-share growth
- 2.1% dividend yield
- -6.7% multiple reversion
In this scenario, total annual returns would reach less than 1% per year over the next five years. Shares of Walmart are significantly overvalued compared to its history and this is weighing on our expected total 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 e-commerce growth is reflective of this view.
The company has performed well and the stock has outpaced the S&P 500 over the past two years. We find the company’s dividend track record to be impressive, even if the most recent raise was 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.