Own Wal-Mart for the Next Decade
An investor who bought Wal-Mart (WMT) in 2000 would have paid between $44-$62 per share. At the midpoint of $53, Wal-Mart had a market capitalization of approximately $238 billion on its 4.5 billion shares outstanding. Its annual dividend of 24 cents yielded less than .5%.Earnings were $1.25 per share, with a P/E of 42. However, the growth prospects were great; this reminds one of investing in Amazon today.
It is well known that Wal-Mart has been dead money for the past decade. This consolidation phase has transformed a highly priced growth stock into a value stock. Although the share price has moved above $56 the past month, it is an attractive enough value that I believe could return a compounded 7% annually over the next decade. These respectable returns should materialize as a result of 8 to 10% annual dividend increases (the current yield is about 2%); massive stock buybacks that have already reduced outstanding shares from 4.5 to 3.5 billion shares over the last decade and have accelerated as Wal-Mart generates more cash flow; a steady increase in retail space square footage in domestic urban areas and internationally; and lastly, a remarkable under ownership among institutional investors.
Over the last decade, dividends were increased by about 18% annually, from $.24 to $1.2. I expect Wal-Mart to increase its dividend by at least 8% annually over the next decade, from $1.2 to $2.6 in 2020. Dividends ought to account for about 1/3 of the expected 7% total return for the stock. I would expect Wal-Mart’s earnings to roughly double over the next decade from $4 to over $8, helped along by continued buybacks and square footage expansion. This would leave the stock somewhere in the upper $80’s in price, assuming a still modest P/E and about a 3% yield.
In the last decade Wal-Mart has reduced its outstanding shares from about 4.5 billion to about 3.5 billion from stock buybacks. However in the past year, Wal-Mart bought back over 250 million shares alone. These buybacks have created certain market implications. Wal-Mart’s weighting in the S&P 500 has been declining, and every year funds that directly or indirectly track the index sell the shares. (A major S&P reweighting that occurs at the end of June is usually a good time to buy Wal-Mart shares.) The generally stagnant stock price has led other funds to abandon the stock. For instance, Wal-Mart’s major institutional investors are all S&P trackers along with Berkshire Hathaway. At the end of the last quarter, Fidelity owned more in dollars of Lululemon than Wal-Mart stock.
If Wal-Mart buys back another billion shares over the next decade, which is possible due to its enormous cash flow, the market capitalization in the upper 80s would be only 10% higher than current levels. Over time there is clearly room for appreciation beyond my conservative estimates.
Also, Wal-Mart has an enormous family ownership of shares. Currently, the family owns about 47% of all shares outstanding. In the middle of the last decade, S&P changed its weighting rule to eliminate insider ownership from the index weight. This is another reason for the institutional under ownership in Wal-Mart in relation to its size.
Wal-Mart is making inroads in domestic urban areas, which have fought the company’s expansion in the past. Chicago recently approved a new Wal-Mart location and is considering many more. The New York City area has greatly softened its opposition in recent city council meetings.
Empirically speaking, Wal-Mart presents a great value investment. Who knows how earnings will look in the next quarter? Stock market weakness and Wall Street’s apathy toward the stock are opportunities to accumulate shares. At some point the share price will lurch upward when institutions attempt to overweight the shares. Although not reflected in the stock price over the last decade, Wal-Mart has been and will continue to be a great vehicle for generating long-term returns.
Disclosure: Long WMT
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