Is Wal-Mart a Buy?

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From its humble beginnings of a single location opened in 1962, to its current status as one of the world’s true juggernaut companies, Wal-Mart (NYSE: WMT) is an amazing American success story. The company sells virtually everything, and operates more than 10,000 retail stores in more than 25 countries.

There are few companies in the world with the truly breathtaking size and scale of Wal-Mart. This company produces some out-of-this-world financial figures, including annual revenues in excess of $460 billion. What’s an investor to think of the discount retailing juggernaut at the present time?

Numbers that are hard to believe

If Wal-Mart’s annual revenues make you scratch your head, it’s for good reason. If Wal-Mart were its own country, its $469 billion in 2012 sales would rank it among the top 30 nations in the world by gross domestic product. Furthermore, Wal-Mart employs more than two million people.

Wal-Mart reported first quarter diluted earnings per share growth of 4.6% year over year, on the back of a 1% increase in consolidated net sales. Wal-Mart recorded nearly $2 billion in free cash flow during the first quarter, and expects at least 3.4% earnings growth in the current quarter.

A competitor misses the Target

Close competitor Target (NYSE: TGT) has seen some difficulties in recent months. The discount retailer reported first-quarter sales and earnings that widely disappointed, and was quick to attribute this under-performance to the unseasonably cold weather in the United States through the first three months of the year.

All told, the $44 billion discount retailer reported just 0.5% sales growth in the first quarter, to $16.6 billion, missing analyst expectations of $16.82 billion. Worse was that same-store sales, which measures only those locations open at least one year, actually fell 0.6% over the first three months year over year. The last time Target’s quarterly same-store sales declined was in the third quarter of 2009.

Somewhat alarmingly, Target’s first-quarter profits fell fairly significantly, to $0.77 per share from $1.04 per share in the same period one year ago. This represents a decline of more than 25%.

Close industry peer Costco (NASDAQ: COST) has executed much better than Target recently. Costco recently reported May same-store sales that were 5% higher versus May 2012. Furthermore, Costco is doing well to start the year: comparable sales over the first 39 weeks of the year, through June 2, are 6% higher than the same period last year.

Moreover, diluted earnings per share rose 18% in the third quarter and 29% over the first nine months of 2012, year over year.

Retailers ringing up the shareholder rewards

These three retailers all do an admirable job of funneling profits through to shareholders. In 2012, Wal-Mart returned $13 billion to shareholders in the form of dividends and share buybacks, and the company’s Board of Directors recently authorized a new $15 billion share buyback program.

Furthermore, Wal-Mart recently increased its dividend by 18%. Wal-Mart has increased its dividend every year since the first declared dividend of $0.05 per share in March 1974. The dividend has doubled over the past five years.

Despite its recent troubles, Target increased its quarterly dividend by nearly 20%. Target says it is the 184th consecutive dividend paid since it went public in 1967. The company’s next quarterly payout of $0.43 per share will have grown by 22% compounded annually over the past five years.

Costco has really ramped up its shareholder distributions, recently raising its dividend 13% and already having paid a $7.00 per share special dividend in December last year. Costco’s payout has nearly doubled over the past five years.

I see each of these discount retailers as extremely similar stocks, with the exception of Costco. Costco routinely trades for a higher multiple than Wal-Mart and Target, and by association, a lower dividend yield.

Wal-Mart and Target, meanwhile, each trade for roughly 15 times earnings and pay a yield in excess of 2.5%. In particular, Wal-Mart is simply one of the biggest companies in the world and carries one of the most valuable brands in corporate existence. The sheer size and scale of this retailer has virtually ensured its dominance.

If you’re a Foolish investor who understands the value of buy-and-hold investing, with Wal-Mart you’ll enjoy a solid current yield, double-digit percentage dividend increases, and reliable profit growth for many years. I believe Wal-Mart is a buy on any dips. For more ideas on Costco, please read below

Costco's low prices haven't just benefited customers -- shareholders have walloped the market, returning 11,000% over the past two decades. However, with prices near all-time highs, is the ride over for Costco investors? To answer that and more, The Motley Fool's compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.

Robert Ciura 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!

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