50 Years of Strong Growth and Counting
Chuck is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past 50 years, Wal-Mart (NYSE: WMT) has grown into the world’s largest retailer. This powerful retail juggernaut reached its lofty status through a legacy of outperforming its peers. For example, the following excerpts from a report by Talkbusiness.net on July 2, 2012, shows how Wal-Mart prospers even while its competitors suffer:
“According to the Bureau of Labor Statistics since 2005, Wal-Mart’s US employee count is up 8%, but overall retail worker unemployment is up 8.7% in the same period. Unemployment in this sector rose from 6.8% in 2005.”
“Courtney Reagan, business analyst with CNBC, said Monday Wal-Mart’s 1.4 million U.S. employees account for 9.4% of the total retail trade workers in the nation.”
“Walmart’s overall impact on the retail industry and beyond has changed the way business is conducted globally, and increased the consumer benefits – regardless of where they shop,” according to Walmartstores.com”
On the other hand, Wal-Mart’s great success has not come without controversy and criticism. The same Talkbusiness.net report also included the following:
“Supporters contend that the chain’s legendary low prices have democratized consumption, allowing low-income households to afford flat-screen televisions, for example. Critics say those low prices have depressed domestic wages and exported manufacturing jobs to foreign countries, hurting Americans more than helping them.”
Personally, I believe that Wal-Mart’s success is greatly deserved because they have clearly made what was once unaffordable, affordable to the masses. There was, without question, a level of creative destruction that accompanied Wal-Mart’s growth. However, I believe that the great benefits to consumers Wal-Mart provided has more than offset any negatives. Nevertheless, great success like Wal-Mart has achieved will always be open to scrutiny and criticism.
A Great Lesson in Valuation
Whether you love Wal-Mart or despise the company, supporters and detractors alike must acknowledge their great operating success. The following F.A.S.T. Graphs™ plots Wal-Mart’s earnings (the orange line with white triangles) and dividends (the blue shaded area) since 1996. Clearly, Wal-Mart’s operating history paints a picture of extremely consistent, yet above-average, earnings and dividend growth.
However, when stock prices are brought into the equation we get a very clear picture of how foolish the stock market can be. Moreover, we can clearly see not only how foolish the stock market can be, but how long the foolishness can last. From 1996 to 1999, Wal-Mart’s stock price rose dramatically above its earnings justified valuation (the orange line). Then, from 1999 until the summer of 2007, Wal-Mart’s stock price was range-bound and drifting lower even though operating results were superb.
Wal-Mart 2000 to 2012 - A Story of Conflicting Performances
Detractors of Wal-Mart take foolish pride in pointing out what a lousy investment shares of Wal-Mart Stores have been since calendar year 2000. The following performance table from December 31, 1999 to July 3, 2012 shows that holding Wal-Mart Stores was literally dead money.
On the other hand, Wal-Mart detractors either fail to point out or to understand that Wal-Mart, the business, generated exceptional performance from calendar year 2000 to current time. It was the result of an exuberant market overvaluing the shares that caused the poor price performance.
After Wal-Mart’s stock price moved back into fair value in 2007, shareholder performance has since aligned itself with the company’s operating performance. Capital appreciation equaled 9.2% and closely correlated to the company’s earnings growth of 9.9%. Add in dividends, and shareholders in Wal-Mart stock earned double-digit returns during a time that the average company, as measured by the S&P 500, provided literally zero results.
Clearly, owning shares in Wal-Mart Stores has been a much more rewarding investment when the stock price has been aligned with intrinsic value. Since 2008, Wal-Mart has presented investors numerous opportunities to be purchased on sale.
A Giant versus the Competition
When you compare Wal-Mart to its competitors, you begin to see how truly remarkable its record has been. It is almost 6 times bigger than its nearest competitors, Target Corp. (NYSE: TGT) and Costco (NASDAQ: COST), and yet its earnings growth since 1998 has been higher than both. Family Dollar Stores (NYSE: FDO) is the only competitor with a higher historical growth rate and Sears Holdings Corp. (NASDAQ: SHLD) has been a non-factor recently.
Summary and Conclusions
Wal-Mart may be 50 years old, but it can hardly be considered an aging retailer. Furthermore, even though it’s a behemoth, it continues to grow at double-digit rates and offers an above-market dividend yield that is expected to grow twice as fast as the market in general. Its current PE ratio of 15 indicates that the world’s leading retailer is fairly priced at today’s levels. For those investors seeking above-average growth and income, it would be foolish for them to ignore Wal-Mart Stores.
ChuckCarnevale has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.