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Why I Just Added To My Wal-Mart (WMT) Position

6 April 2011 One Comment

I’ve talked before why I like Wal-Mart (WMT) as an investment.  It’s essentially a two-fold play:

  1. International – All of Wal-Mart’s growth is international.  They are growing their international business in a very effective manner – one which is very underrated at this point by the investment community in my opinion (which means it’s a good buying opportunity).  Wal-Mart is opening new businesses in countries around the world, and wisely, it’s not always a Wal-Mart store as we know them in America, but are local business with local products.  If you want international exposure, but don’t know which foreign stocks to buy, you can essentially get a similar play by owning Wal-Mart.
  2. Depression – Back here in the States, Wal-Mart will hold up very well in what I view as a long-term stagnant economy where the standard of living is flat to decreasing for most people.  This is a good investment play for a crappy domestic economy.

The main risk to the business is of course the fact that the supply chain and inventory system of Wal-Mart is somewhat dependent on cheap energy (oil).  While this is an obstacle, it’s not a doomsday scenario.  In my opinion, it’s only a matter of time before we start to leverage an energy source we have lots of: natural gas.  Trucking in America isn’t going anywhere no matter what your fellow peak oil guy will tell you.  If oil hits $300 a barrel (which it might), it will accelerate a transition to natural gas in my opinion even if the environmentalist-purists balk at it.

So, fundamentally, I love Wal-Mart (WMT).

In a market where it’s tough to find stocks that aren’t expensive, I think WMT is an attractive buy.  The stock has essentially gone nowhere for ten years.  This is a good thing.

The following chart shows WMT stock price along with the P/E ratio which you see has declined steadily over the years:

WMT Stock Chart by YCharts

Why has the P/E gone down? Because the share price has remained flat while earnings have increased each year. This is a good thing.

Over the same time period, you can see the dividend increase:

WMT Stock Chart by YCharts

Another great thing. Increasing dividend payouts with a stagnant share price means the yield has been increasing. In my opinion, it’s only a matter of time before the share price starts to creep up as well. For now, however, I want the share price to remain depressed (so I can accumulate more shares).

As you can see in the next chart, you can see the operating cash flow (cash generated by the business of Wal-Mart) increasing over time along with the dividend increasing over time.

WMT Stock Chart by YCharts

The next chart shows you the increase in share buybacks as well as dividend payouts over the same time period.

WMT Stock Chart by YCharts

This shows you the steady return of value to shareholders by the Wal-Mart management. I prefer dividends to buybacks, but there are worse things than buying back shares. Wal-Mart is dedicated to shareholder value, a major plus for an investment.

Wal-Mart is generated tons of cash, enough to continue to increase their dividend well into the future even assuming no growth. Thankfully, as I mentioned above, I believe there is tons of growth to come from the international side of the business.

So, when to buy? Well if you take a look at this chart, you can see the stock has been range bound for ten years. I think anything under $55 is a decent buy. Anything under $50 is a screaming buy.

With the current dividend of $1.46 per share, the yield is 2.65% at a $55 share price and 2.92% at a $50 share price. If something causes the shares to hit $45 for some reason (maybe the current class action law suit where women employees are suing the company???), then back up the truck and load up shares. $45 share price will get you a 3.17% yield on current investment.

Remember, the dividend payout grows every year, so your yield on cash outlay will go up every year. I like the sound of that.

One Comment »

  • @piratecents said:

    I admit, I am a novice with regards to offshoring capital. From my altogether woeful knowledge, it appears that money earned offshore is not frequently repatriated to the US because then it'll be taxed. Better to invest it overseas, keep the money growing and keep avoiding (US) tax. They still pay overseas Taxes.

    So dividends are thus being paid by onshore capital, correct? If this is the case, and the Wal-Mart growth mechanism is international growth, then I would imagine that Walmart's divident potential is going to quickly reach a maximum, unless it knows of a loophole in the tax laws that most other major firms do not.

    I wonder if Walmart's overseas profits can be used to repurchase shares on overseas markets without incurring US taxes?