Friday, June 10, 2011

Wal-Mart Stock Analysis

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. Wal-Mart Stores has paid uninterrupted dividends on its common stock since 1973 and increased payments to common shareholders every year for 37 years.The most recent dividend increase was in March 2011, when the Board of Directors approved a 20.70% increase to 36.50 cents/share. The major competitors of Wal-Mart Stores include Costco Wholesale (COST), Target (TGT) and Family Dollar (FDO).

Over the past decade this dividend growth stock has delivered an annualized total return of 2.60% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 12.20% per year since 2001. Analysts expect Wal-Mart to earn $4.44 per share in 2011 and $4.88 per share in 2012. This would be a nice increase from the $4.18/share the company earned in 2010. On average the company has managed to repurchase 2.20% of its stock annually over the past decade. Wal-Mart has one of the largest and most consistent stock buyback programs in the US.

The company has had a high return on equity, which has remained in a tight range between 20% and 23% over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 17.70% per year since 2001, which is much higher than the growth in EPS.

An 18% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1976, we see that Wal-Mart has actually managed to double its dividend every three years on average.

Over the past decade the dividend payout ratio has increased from 18.70% in 2001 to 29% in 2010. This has mostly been as a result of dividend growth being faster than earnings growth. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Wal-Mart fits my entry criteria as it is trading at 12.30 times earnings, yields 2.70% and has a sustainable dividend payout. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long WMT

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