Wal-Mart: A Solid Dividend Story

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Wal-Mart (NYSE: WMT) may not be one of the most liked companies in the US, but with its solid dividend yield and stock price appreciation, the stock is certainly loved by investors. The company is securely on its way to bigger growth, despite employee unrest and general dissatisfaction of the masses with its allegedly inferior-quality products. 

At its prevailing market price, the company offers a rather attractive dividend yield of about 2.3 percent, and the stock is popular among income investors. The company has a track record of paying increasing dividends over the past 38 years, and with about a 32 percent payout ratio, it is highly likely that the dividend stream is going to be fairly reliable for the near future. Wal-Mart is scheduled to announce its fourth quarter and full year numbers on Feb. 21 and, due to weak guidance, the numbers are expected to be less than spectacular. However, since the company has long held tradition of increasing its dividends, it is expected that Wal-Mart will continue with the theme and put more money in its investors’ pockets.

The retail chain store company is also going big on its expansion plans. It is expanding big time to counter its closest rival Target (NYSE: TGT) in foreign markets such as Canada. Target is looking to open about 125 new stores in Canada. In response, Wal-Mart announced the outlay of $454 million to expand its presence in the Canadian market. The big box retailer already has 379 stores in Canada and is planning to add 37 more.

While both Wal-Mart and Target are mainly brick and mortar retailers and thus have somewhat similar cost-structure, Amazon (NASDAQ: AMZN) is putting up a good fight as it has considerably lower costs. Wal-Mart positions itself as a discount retail chain, but Amazon is able to provide similar low costs and thus eats into Wal-Mart’s business in many segments, such as apparel. In order to fight the competition, Wal-Mart started new plans like same day delivery and sprucing up its online presence. However, Amazon currently drives up the volume by charging minimal margin. In order to be competitive, Wal-Mart may have to engage in price wars, putting pressure on its bottom line.

Wal-Mart also seems to be running into regulatory messes fairly regularly. In the recent past, it has been implicated in bribery scandals in Mexico and India. While these controversies seem to be already priced in, these ethical missteps may cost the company in its PR exercise. The company is also looking to clean up its public image. After a recent fire incident at one of its suppliers’ facilities, the company reviewed its sourcing policy. The company has now moved on from its ‘three strikes policy’ to ‘zero tolerance norms.’ The step may add to the company’s sourcing cost, though it will also help in creating goodwill.

Another area of concern for Wal-Mart is related to its workforce. The retail giant is constantly being sued by its employees for discrimination, poor working conditions and dismal pay policies. Increased labor costs are certain to eat into the company’s bottom line.

Wal-Mart’s Q3 financial numbers were weaker than anticipated, and its full year guidance also fell short of expectations, raising concerns about the future growth rate of the company. While it is difficult to retain accelerated rate of growth, Wal-Mart needs to up the ante to fight the competition from its peers like Target and Costco. In comparison to Wal-Mart, Target is looking to increase its annual revenue by more than 6 percent. Costco has also been posting good growth for its same store sales and is looking forward to perform well.

Wal-Mart is expanding its global presence. In the previous financial year, the company derived about 28 percent of its revenue from the markets outside of the US. However, international sales showed much healthier rate of growth than domestic market. Its international revenue grew at 8.4 percent per annum in the past three years, while the rate of growth for domestic revenue stood at a feeble 1.7 percent. However, its attempts at international expansion have run into several problems including adoption of unethical measures. It has planned to slash its expansion plans in Brazil and China. This pullback may have an impact on its projected revenue growth.

Wal-Mart is an established player and possesses resources to counter competition from other brick and mortar stores and online businesses. The stock is currently about 10 percent below its 52 weeks high price and offers a good entry point. Its regular dividend payment is the cherry on top.

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