These Retailers Can Bring Your Portfolio a Lot of Green
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Consumer spending, one of the backbones of the American economy, has been on the rise throughout the economic recovery. These three retailers stand above the rest, and provide great returns to shareholders.
We will examine these companies based on a few factors, including valuation, dividend analysis, financial health, and growth prospects moving forward.
Source: Yahoo! Finance
Wal-Mart (NYSE: WMT) is currently trading at a discount to the S&P 500:
- Price-to-earnings ratio (trailing-12 months): 15.2X (18.1X)
- Price-to-earnings growth (PEG): 1.7 (3.0)
This is combined with a five-year sales growth rate of approximately 4.5%, and trailing-12 month earnings-per-share growth of 8.8%.
Wal-Mart is a dividend stud that currently yields 2.4%. It has raised this dividend annually for the last 39 years. This dividend consumes approximately 37.1% of its earnings per share, indicating room for future growth. Its dividend growth has slowed some over the last 10 years, falling from a 10-year dividend growth rate (DGR) of 18% to a one-year DGR of 11%. This is not a cause for concern, as the recession can be partially blamed for the slowdown of growth and the rate is still significantly higher than inflation.
Wal-Mart is also financially fit. Its total debt-to-equity ratio is below 1.0, currently sitting at 0.8. Wal-Mart has a low net profit margin of only about 3.8%, but this is due to the way Wal-Mart conducts business. Wal-Mart (and discount retailers in general) cannot put large mark-ups on its products in order to offer them at such competitive prices. Actually, Wal-Mart does a good job of being efficient, with a return on equity of approximately 24.5%.
A company as big as Wal-Mart can face some troubles when it comes to future growth. However, Wal-Mart looks to continue adding stores, both domestically and internationally. Wal-Mart will look to ramp up its store count further through smaller "express" stores. The big-box retailer is also making a more concentrated push into online sales to compete with Amazon.
A store for the "trendy" crowd
Source: Yahoo! Finance
Target (NYSE: TGT) is currently trading at discount to the S&P 500:
- Price-to-earnings ratio (trailing-12 months): 16.8X (18.1X)
- Price-to-earnings growth (PEG): 1.6 (3.0)
This is combined with a five-year sales growth rate of nearly 3.0%, and trailing-12 month earnings-per-share growth of -1.5%.
Like Wal-Mart, Target has a great dividend track record--Target has raised its dividend for 46 years and counting. The yield on current pricing is 2.4%, and the dividend has room for future growth, as it only consumes about 40.4% of earnings per share. Target also offers one of the fastest-growing dividends out there. Its 10- year DGR is 18.6%, and has stayed at that pace with a one-year DGR of 20.0%.
Target sits just below par with a 0.9 debt-to-equity ratio. Target has had to take on some debt, as it is deep into its expansion into Canada and addition of fresh groceries to its stores. The discount-retail business takes its toll on Target's profit margins as well, with a net margin of 3.8%. Target makes up for this on its return on equity, achieving a 17.3% return. While good, Wal-Mart is still able to do just a bit better.
Target is a retail blue chipper, but it still has some room to expand. As mentioned, Target is concentrating on growing through a Canadian expansion, and the addition of fresh groceries to its stores known as "P Fresh." Target is also gunning to take market share from Wal-Mart; its focus on the "shopping experience" and trendy products help differentiate it from its bitter rival.
This store is growing fast
Source: Yahoo! Finance
Costco Wholesale (NASDAQ: COST) is currently trading at a premium to the S&P 500:
- Price-to-earnings ratio (trailing-12 months): 25.81X (18.1X)
- Price-to-earnings growth (PEG): 2.0 (3.0)
This is combined with a five-year sales growth rate of 9.0%, and trailing-12 month earnings-per-share growth of approximately 26.8%.
Costco is well on its way to being a great dividend growth stock, if it isn't already. It has raised its dividend annually for the last 10 years. It currently yields 1.0%. It is currently paying out only 27.3% of its earnings, which signals high dividend growth ahead. Its dividend-growth rate has risen from 13.5% seven years ago to a one- year growth rate of 15.1%. With Costco in a state of such high growth, the dividend may be tempered a bit over the immediate future to leave capital for expansion.
Costco has surprisingly little debt considering its growth. Its total debt-to-equity ratio is only 0.5. Costco is however, not quite as efficient as incumbents Target and Wal-Mart. Costco's net profit margin is currently 1.9%, and its return on equity is 17.3%.
Costco's high rate of earnings growth should make you excited about the future. Costco is expected to grow its earnings 13.2% annually over the next five years, the highest growth rate of our three companies. It places an emphasis on quality and pays its employees above-average wages having the satisfaction flow down from the employee to the customer. Costco offers differentiation from the traditional retail chain, and looks to have a bright future as it expands further throughout the United States.
The bottom line
With consumer spending rising, there are a handful of retailers raking in the dough. Whether you want proven results and dividend growth with Wal-Mart, an up and comer changing it up such as Costco, or a little of both with Target - each has beaten the market over the long term.
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.
Justin Pope has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of 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!