Company Description: Wal-Mart Stores, Inc. is the largest retailer in the world, operating a chain of over 10,000 discount department stores, wholesale clubs, supermarkets and supercenters.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
WMT is trading at a discount to only 3.) above. When also considering the NPV MMA Differential, the stock is trading at a 119.2% premium to its calculated fair value of $56.61. WMT did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
WMT earned one Star in this section for 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 46 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in WMT would be less than a similar amount invested in MMA earning a 20-year average rate of 2.74%. If WMT grows its dividend at 1.9% per year, it will never equal a MMA yielding an estimated 20-year average rate of 2.74%.The negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in WMT would be less than a similar amount invested in MMA earning a 20-year average rate of 2.74%. If WMT grows its dividend at 1.9% per year, it will never equal a MMA yielding an estimated 20-year average rate of 2.74%.
Peers: The company's peer group includes: Costco Wholesale Corporation (COST) with a 0.9% yield, Target Corp. (TGT) with a 2.2% yield and PriceSmart Inc. (PSMT) with a 1.3% yield.
Conclusion: WMT did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks WMT as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $57.03 before WMT's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 46 years of consecutive dividend increases. At that price the stock would yield 3.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 9.6%. This dividend growth rate is higher than the 1.9% used in this analysis, thus providing no margin of safety. WMT has a risk rating of 1.75 which classifies it as a Low risk stock.
WMT enjoys dominant positions in most markets where it competes. WMT's huge scale, geographic and product diversities, aggressive cost savings and strong international presence and increased marketing of its core value message should deliver improved results in the long-term. Going forward, WMT will face fierce competition from Costco, Amazon, dollar stores and other such retailers. The stock is trading at a significant premium to the $56.61 calculated fair value. Until this changes, I will not add to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in WMT (1.4% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: WMT, COST, TGT, PSMT,
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