I just came back from one of the stores of Ahold (AH) for my weekend groceries. I own shares of Ahold for more than 7 years. In my car back to my home I was thinking about my Vrijheid Fonds. Ahold’s turnover comes for more than 50% from the USA. And I was wondering, which company in the USA is in the same sector.
And of course if you say retail in the USA you immediately think of Wal-Mart. The company operates under the Wal-Mart name in the US. It also has shops in Mexico, the United Kindom, Japan and India. And has also operations in Argentina, Brazil and Canada.
Wal-Mart is the world’s largest company by revenue, according to the Fortune Global 500 list in 2014. And is the biggest private employer in the world. Wal-Mart has more than two million employees!
The company is a family-owned business, as the company is controlled by the Walton family, who own over 50% of Wal-Mart Company through their holdings company, Walton Enterprises. Okay enough small talk 😉 Lets take a look at a company that is paying dividend for 41 consecutive years in a row.
This analysis is on Wal-Mart Corporation (WMT).
Company (from google finance): Wal-Mart Stores, Inc. (Walmart) operates retail and other stores in various formats, including membership clubs. The Company operates through three business segments: Walmart U.S., Walmart International and Sam’s Club. The Walmart U.S. segment includes the Company’s mass merchant concept in the United States, operating under the Walmart or Wal-Mart brand with various formats, including supercenters, discount stores, Neighborhood Markets and other small stores, as well as walmart.com. The Walmart International segment consists of the Company’s operations outside of the United States, including various retail websites. Walmart International operates retail, wholesale and other types of units, including restaurants and some banks. The Sam’s Club segment includes the warehouse membership clubs in the United States, as well as samsclub.com.
Can I explain this to a 10-year old? What Does This Company Do?
WMT is a company with a lot of stores where you can go to, to do your groceries. But you can also buy a new television if our current one is broken, or new books to read and enjoy. Numerous stuff can be bought at one of their stores.
Dividend Aristocrat: WMT is paying Dividend for 41 years in a row! And is a Dividend Champion. Its number 51 on the CCC-list from David Fish! And is a 2 star stock on Morningstar.com. This looks like a fine and solid investment. That’s a Pass!
Dividend Yield > 2.5%: The dividend Yield of WMT is 2.2%. This is above the industry average of 1.8%. And still below their 5 years average (2.3%). The Yield is below the requirements of the Pollie-Code, and therefore it failed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 40%. This is below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. Great, keep the dividend rolling in! So also passed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3, 5 and 10 years are 5.7, 11.0, 12.6 and 14.8.6. With a 3 years average over 12%, I get excited. DGR also passed the fourth Pollie-code.
P/E-ratio < 15: WMT has a current P/E ratio is 18.8. Which is higher than their 5 years average (14.8). It is below the industry average of 21.0%. If we look at the current ratio we can say that is above the requirement of the Pollie-Code. Therefore this is a fail on the Pollie-code.
EPS > 0: The EPS is 4.79. So WMT also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 20.7%. Another pass.
Market Cap. > 100M: No problem at this point. More than $ 276.808 Mil. Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 14.8. This is therefore a pass on the Pollie-code.
Stock price 52wk high-25%: The 52 wk. high and low are: 90.67 and 72.27. This means that WMT will be in my buying zone when the stock price is below 86.07 ((90.67-72.27)*0,75 + 72.27). At this moment WMT is trading for $89.35. Therefore it is a fail on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for WMT is 0.47.
Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. On the Internet their 2 formulas can be found.
Stock Value (P) = D / (k-G) or Stock Value (P) = (D*(1+G))/ (k-G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
When applied to GE with D = $1.89, G = 5%, and k = 10% (corporate bond rate 2% + inflation rate 2% + equity risk premium 6% (very solid company), the intrinsic value will be around $40. At this moment WMT is trading above its intrinsic value.
Conclusion: When I look at the analysis, WMT passed 7 out of 10 from the Pollie-code. The Pollie-code failed at the Dividend Yield, P/E-ratio and stock price. In my article ‘Another way of looking at my portfolio – DGR’ I calculated my weighted dividend yield and dividend growth rate. If we add these two metrics together, it gives a hypothetical free income rate. For WMT this will be over 13! Wow Great! WMT is a stock with a low Dividend Yield but with a high Dividend Growth rate. And that is what I like!
If we take a look at Gordon Growth Model we can see that the stock is trading in the overvalued zone. But still below the industry average (P/E). And last Friday WMT was also trading near the zone of their 52 week high.
WMT is slowly repositioning itself to take advantage of growing e-commerce demand. As Sure dividend wrote, WMT is expecting 30% to 40% e-commerce growth over the next several years. The company is investing heavily in digital and e-commerce growth. So there is a lot of potential here!
WMT is a great company, which is a bit overvalued at the moment. I think it will be a nice addition to my Vrijheid Fonds. Therefore I’ll keep WMT on my watch list.
What are you – the readers, thoughts on Wal-Mart? Is it a buy, do you own it? I’m especially curious about your valuation of WMT.
Please comment on my analysis and thanks for stopping by!