As a dividend growth investor, I am always looking for additional dividend-paying opportunities. These opportunities can be either new positions or additions to existing positions within my portfolio. I constantly scan for investments and analyze them, and if the opportunity is attractive and the valuation is fair, I will probably buy some shares.
I owned shares in Walmart (NYSE:WMT) for the last several years. I added the shares when I started my dividend growth portfolio back in 2015, and I have never added to the position. Whenever I needed additional exposure to consumer staples companies, Walmart was just too expensive for me. As the volatility in the markets is on the rise, it is a good opportunity to take another look.
I will analyze the company using my methodology for analyzing dividend growth stocks. I am using the same methodology to make it easier for me to compare analyzed stocks. I will look into the company’s fundamentals, valuation, growth opportunities, and risks. I will then try to determine if it’s a good investment.
According to Seeking Alpha’s company overview, Walmart engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam’s Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, and discount stores; membership-only warehouse clubs; e-commerce websites, such as walmart.com, walmart.com.mx, walmart.ca, flipkart.com, and samsclub.com; and mobile commerce applications.
Over the last decade, the company has increased its revenues very modestly. A 26% increase equates to roughly 2% annually. The company is a giant with sales approaching $600B. Its sales are mostly organic, and the company is now investing in improving its e-commerce business. Going forward, the consensus of analysts, as seen on Seeking Alpha, expects Walmart to keep growing sales at an annual rate of ~3% in the medium term.
The EPS (earnings per share) has grown at an even slower pace. Even when taking into account non-GAAP numbers, EPS growth has been in-line with sales growth. Slow EPS growth was because the company has been heavily investing in its shift to e-commerce resulting in operating margins declining. However, from 2018, we see increased EPS growth with EPS growing at roughly 8% annually. Going forward, the consensus of analysts, as seen on Seeking Alpha, expects Walmart to keep growing sales at an annual rate of ~7% in the medium term.
Walmart is a dividend aristocrat with a long history of dividend increases. At the moment this streak stands at 48 years in a row, and it doesn’t seem like it is going anywhere. The dividend yield may not be impressive at 1.4%, yet it is extremely safe with a payout ratio of 45%. The company has already announced the dividends for 2022, and investors got another 2% increase. Going forward investors should expect similar increases as the company still heavily invests in its business.
The company is also returning capital to shareholders in the form of buybacks that are additional to the dividends. Over the last decade, Walmart has bought back almost a fifth of its shares outstanding. As a dividend growth investor, I appreciate capital returned to shareholders, and discretionary buybacks in addition to dividends while the company is growing is always a plus.
The company’s P/E (price to earnings) ratio is at its highest point over the last twelve months. The shares of Walmart are trading for 23 times forward earnings despite the increased volatility. It seems like Walmart has become a haven, thus investors are paying a premium to buy shares as the current valuation doesn’t fit the EPS growth rate.
The graph below from Fastgraphs.com emphasizes how shares of Walmart have been trading above their average valuation for the last three years. The average P/E ratio over the past two decades was 18.7, and the current one is significantly higher at 23. The forecasted growth on the other hand is in line with the company’s historical growth rate, so it is a bit hard to justify the current valuation based on the growth rate.
To conclude, Walmart offers solid fundamentals. Slow yet persistent top and bottom-line growth, which fuels stable dividend growth and share buybacks. The company may not offer fast growth, but its quality is in its stability and predictability. However, investors right now appreciate both these traits, and shares of Walmart seem to be trading for a premium.
E-commerce is the largest growth opportunity for Walmart in the foreseeable future. While the company has a significant presence around the United States, it’s quickly growing its online business by heavily investing in it. In the United States, e-commerce sales grew by 70% during the last two years, and the pandemic has exposed more consumers to this option. E-commerce exposes Walmart to a business with higher margins, and it is already the second-largest e-commerce company in the U.S.
The best offer that Walmart has is combining its brick-and-mortar business with its e-commerce business. Building a seamless omnichannel experience for clients is a significant opportunity for growth. Consumers buy on the app and they can either get home or they can pick it up immediately from the store with a Walmart employee handing them their order. This flexibility is an advantage Walmart and Target (TGT) have over Amazon (AMZN) and eBay (EBAY).
Walmart also enjoys a significant scale as a growth opportunity. As inflation is on the rise, Walmart has unprecedented bargaining power with suppliers which will allow it to mitigate the effects. Mitigating price increases will allow Walmart to either increase prices, or increase market share by offering consumers cheaper prices in an inflationary environment.
The lack of margin of safety is a prominent short-term risk for investors in Walmart. The company is trading for a valuation that is 20% higher than its average valuation. It leaves investors with a very little margin of safety if the company misses expectations, or if the market trend changes and investors again start seeking riskier assets.
In addition, there is also a medium-term risk for income and dividend growth investors. If the inflation stays higher than the Federal Reserve target of 2%, then investors in Walmart get a dividend that grows below the inflation rate. Therefore, while the dividend may be growing nominally, real dividend payments will be decreasing.
The long-term risk for Walmart is the competition. Right now, it is enjoying a market leader position, but its peers are always trying to fight for market share. Online retailers like Amazon and eBay as well as traditional retailers will force Walmart to keep investing both in its stores and its online interface. It will also make it harder to increase prices as competition is fierce.
Walmart is a great, classic American company, and it serves as a haven for investors during volatile times. The company is stable and growing slowly and persistently. The company has significant growth opportunities and limited business risks. Therefore, investors feel extremely comfortable parking their capital with Walmart.
However, this has resulted in a higher valuation. The company’s current P/E leaves little margin of safety for investors. Investors should put Walmart on their watchlist. If the volatility persists, eventually Walmart will suffer as well and investors should consider buying shares in Walmart if it reaches a P/E ratio of ~18.5 which equates to a share price of $125.