Why Investors Are Dead Wrong About Wal-Mart
Wal-Mart (NYSE: WMT) shocked the investment community on Wednesday morning during its 22nd annual investor meeting. The company, not known for investor surprises, lit up online forums and made headlines by announcing that its bottom line could fall as much as 12% next year.
Shares plummeted 10% by the end of the day, causing some to question whether the inevitable pressure from e-commerce competitor, Amazon (Nasdaq: AMZN), is finally getting to Wal-Mart.
As for why the company expects to see a profit cut of 6-12% next year, its management blamed it on its spending programs.
Earlier this year, Wal-Mart raised its employees’ minimum wage to $9 per hour. Next year, that’ll go up to $10 per hour. Along with this wage increase, the company is also putting hundreds of millions of dollars into its ecommerce business.
These are not truly new ideas. Investors have already known that Wal-Mart was raising wages and spending more on ecommerce. Yet apparently, they didn’t think it would have these consequences.
This fall has only added to Wal-Mart’s terrible year in the market.
Prior to this meeting, its stock was already down 22% on the year. Considering Wal-Mart was one of the only stocks to post a double-digit gain in 2008 as the rest of the market collapsed, its 2015 performance is at the least jarring.
But there are good reasons why investors are wrong to run from WMT.
First, increasing spending on employee training and benefits and aggressively growing its online presence are all great moves for a company that already has a half-of-a-trillion dollars in annual revenue.
Speaking of revenue, along with its earnings per share projections, the company also gave its revenue forecast for the next few years. Wal-Mart executives see their top line GROWING at about 3%.
But the number one reason investors have oversold WMT’s stock is its shareholder value programs.
Wal-Mart’s Triple Dividend
The giant retailer may not be known by everyone as a big income stock. But it should be.
Wal-Mart has hiked its quarterly dividend each year since 1974. People once bought General Electric and Citibank for their dividends. Yet neither of those companies can boast the same.
During its Wednesday investor meeting, it also forecasted another hike for its next fiscal year.
On top of its regular, increasing dividend, WMT is also actively buying back its common stock.
The company had announced in 2013 a program to buy back $15 billion worth of its stock. During Wednesday’s meeting, CFO Charles Holley announced a second $20 billion buyback program on top of that first one.
That’s a lot of stock to buy back. Holley expects to complete both over the next two years.
These three items together — growing dividend, $15 billion 2013 buyback program and this additional $20 billion plan — act like a triple bonus for shareholders.
But what truly makes this huge dip in Wal-Mart’s share price so enticing, to me at least, is that it is an opportunity to buy one of the world’s best companies for a huge discount.
Think about it. Wal-Mart:
1. Is the leading retailer in the world
2. Has a global reach and scalability
3. Sells products people need — everything from groceries to health care products
4. Can compete with any other retailer — even Amazon — on price and convenience
5. Is extremely shareholder-friendly with its proven history of dividends and buybacks
6. Has the cash flows ($16.4 billion in annual free cash flow) and cash on hand (another $5.7 billion) to take advantage of any new market opportunities, while continuing to afford those programs
This is a world leader — a member of the Dow Jones Industrial Average. It is not going anywhere. It’s the kind of stock that investors should buy and hold for 10, 20 or even 30 years at a time. It’s certainly not the kind of stock you throw away because of a potential bad year.
In fact, this is the kind of stock my colleague Dave Forest looks for in his premium advisory, Top 10 Stocks. And he only features the best of the best.
Finally, if I didn’t point out what this selling did to WMT’s dividend yield, I’d be foolish. Wal-Mart has grown its quarterly dividend each year since 1974. But it has never yielded what it does today.
With this share price fall, its yield is sitting at an all-time high. You won’t likely get another chance at locking in a yield of 3.3% on WMT ever again.
Unless you are looking to cash out your entire stock portfolio within the next 12 months, Wal-Mart is definitely one you should consider buying today.
When you look back at this in five or 10 years, you’re going to be amazed anyone would have sold it just because of a single bad year… that hasn’t even happened yet!
Risks To Consider: While Wal-Mart is proving it is serious about ecommerce with its latest spending plan, it will continue to face competition on that front, namely from Amazon. But Wal-Mart’s distribution network and international presence clearly make up for any threats from e-retailers.
Action To Take: If you are a long-term investor, interested in owning one of the best companies for the long-term, you can’t beat WMT at these prices and locking in a minimum dividend yield of 3.3%. Consider adding this stock to your buy-and-hold portfolio.
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