Live Better By Investing in Wal-Mart
Greg 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) is one of the most successful companies in U.S. history. I am still amazed at how Wal-Mart grew from only one small grocery store in Arkansas into a global retail giant consisting of over 10,000 stores. Wal-Mart's stock has been equally as impressive, increasing from a split adjusted $0.06 per share in 1972 to a close of $69.12 at the end of 1999. After this amazing run, Wal-Mart was due to cool off for a while, and did it ever! Over thirteen years later, Wal-Mart is currently trading at almost the same identical level as the 1999 closing price.
It does not take a rocket scientist to realize that the early 2000s were not the best time to buy Wal-Mart. At the beginning of 2000, the P/E ratio was near 70 and the dividend yield was only 0.29%. These numbers are looking much better now with a P/E ratio of 14 and a dividend yield of 2.3%. Since the start of this century, the share price has been flat, while annual revenues have tripled from $138 billion to $464 billion, and net income has increased from $4.43 billion to $16.59 billion.
Wal-Mart has increased its dividend every year since initiating it in 1974 and is a component of the Dividend Aristocrat Index, which consists of companies within the S&P 500 with consecutive annual dividend increases of at least 25 years. Over the last decade, Wal-Mart's annual dividend has multiplied by 4.42 times, from $0.36/share to $1.592/share. If the dividend is increased at this same level during the next ten years, the effective dividend yield would be 10.1%. Taking this one step further, if the dividend is increased at this same level for two decades, your effective dividend yield would be 44.6%, which means that in twenty years you would be receiving $446 annually for every $1000 invested today. By combining this with dividend reinvestment and capital gains, you could potentially have phenomenal returns by investing in Wal-Mart today. Of course, future dividend increases are not guaranteed, but with a payout ratio of only 32%, Wal-Mart's impressive dividend history should continue for many years.
On-Line Retail - Threat or Opportunity?
Amazon (NASDAQ: AMZN) is the king of on-line retail, with annual revenues of $61 billion. There are a large number of investors that believe that Amazon's on-line dominance will lead to the eventual downfall of Wal-Mart. I agree that Amazon is a great company as well as a great growth stock, but I think that Amazon and Wal-Mart can both triumph. There are many items that most shoppers (including myself) prefer not to buy on-line, including groceries, consumer products, and delicate items such as glass products. I believe that there will continue to be shoppers that prefer to never shop on-line, and Wal-Mart's low prices will continue to attract these shoppers. Also, one advantage that Wal-Mart has over Amazon is returned items. If an item needs to be returned, you can take it to your local Wal-Mart instead of having to send it back to Amazon. For these reasons, I believe that Wal-Mart's stores will remain successful well into the future.
Wal-Mart is working hard to turn the on-line retail threat into an opportunity for future growth. Their site to store service allows you to purchase items at Wal-Mart.com and pick them up at your local Wal-Mart. I have used this service on a regular basis and think that it is very convenient. Wal-Mart has made additional efforts to boost its e-commerce capabilities, such as their acquisition of a majority stake in Yihaodian, an on-line retailer in China. Wal-Mart has combined a series of additional acquisitions to create Wal-Mart Labs, which analyzes trends and data in an effort to anticipate consumer needs and to market products more effectively. It is evident that Wal-Mart is taking steps to develop a successful on-line retail business. If Wal-Mart is successful in this endeavor, investors will be substantially rewarded.
What about Competition?
Retail is extremely competitive. In addition to Amazon, Wal-Mart's many competitors include a very large number of discount stores, grocery stores, wholesale warehouses, drug stores, and specialty stores of various sizes. The following paragraphs provide some information on three of the most formidable competitors:
Dollar General (NYSE: DG) is a small discount retailer consisting of close to 10,000 small footprint stores in 39 states with annual revenues of $16 billion. There is no doubt that Dollar General and other similarly sized retailers are taking some market share from Wal-Mart due to their competitively priced products and small, conveniently located stores. However, I believe the damage to Wal-Mart is minimal because consumers mainly utilize Dollar General's stores for small, low quantity purchases in between trips to Wal-Mart. Wal-Mart has some new, smaller footprint shopping options such as Wal-Mart Neighborhood Markets and Wal-Mart Express Stores. Wal-Mart is currently evaluating the effectiveness of these new stores. If successful, this could become a new growth area for Wal-Mart.
Costco (NASDAQ: COST) is a membership-based warehouse that competes directly with Wal-Mart's Sam's Club stores. Costco consists of about 450 stores in the U.S. and close to 200 international locations with annual revenues of $101 billion. Costco and Sam's Club stores both have room to grow, especially in international markets. Costco is a very effective competitor and a solid investment opportunity, especially if you would like to invest in a company that focuses only on the large membership markets.
Target (NYSE: TGT) is a discount retailer consisting of about 1800 stores in the U.S. and Canada with annual revenues of $72 billion. Most of Target's products are similar to Wal-Mart's, however Target is well known for some of it's upscale clothing products. Target's products have historically consisted of higher priced brands than Wal-Mart, although some believe that Target is becoming more price competitive.
These are impressive, growing companies, but competition is nothing new for Wal-Mart. It's efficient retail operations and very large scale continue to allow Wal-Mart to provide the lowest priced products for their customers. I shop at Wal-Mart regularly and also pass by many Wal-Mart and Sam's Club stores while traveling for work. I have noticed one thing in common at all of these stores--they are always crowded! Until this changes I will remain bullish on Wal-Mart.
International Growth Opportunities
Wal-Mart's growth in international markets has been impressive, with a growth rate of over 15% in the 2012 fiscal year. Wal-Mart has retail operations in 27 countries including China, Brazil, Mexico, Japan, and Canada. In addition to Wal-Mart Supercenters and Sam's stores, Wal-Mart's international operations include Trust-Mart Hypermarket retail centers in China, Mercadorama grocery stores in Brazil, Maxi Pali stores in Costa Rica, and a wide variety of additional supermarkets and specialty stores. Wal-Mart's international growth is in its initial stages and should provide growth for many years to come.
Although Wal-Mart's stock price has been flat over the last 13 years, it has recently broken out of a narrow trading range between $50 and $60, reaching an all-time high of over $75. The share price has since fallen to around $70, creating a good buying opportunity. With Wal-Mart's efficient retail operations, on-line opportunities, impressive international success and excellent dividend history, I recommend that you consider opening or adding to a Wal-Mart position as part of a diversified portfolio.
GW1000 owns shares of Amazon.com and Wal-Mart Stores. The Motley Fool recommends Amazon.com and Costco Wholesale. The Motley Fool owns shares of Amazon.com and 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!