Is Wal-Mart A Good Investment?

BERKSHIRE HATHAWAYWarren Buffett is the man. The Oracle of Omaha has been quoted and mirrored for decades. When he makes a call about a stock, the world sits up and listens, be it a long time bullish position in Coca-cola (KO) or an eyebrow raising stake in International Business Machines (IBM). While he does make some shorter term plays, for the most part, when Warren Buffett buys into a stock, he holds on to it and watches the stock increase in value over time – after all, most stocks will increase in value if held long enough thanks to inflation. Many of Buffett’s picks pay dividends as well, further adding to the upside. A perfect example of this is Wal-Mart (WMT).

Wal-Mart is one of the largest positions in his portfolio. As of December 31, 2011, Buffett’s Berkshire Hathaway had over $2.33 billion invested in the company – and he isn’t alone in his enthusiasm. Wal-Mart is also very popular amongst the 350+ hedge funds we track. There were 42 hedge funds with Wal-Mart positions in their 13F portfolios at the end of last year. Besides Buffett, Boykin Curry, Ken Fisher, Jean-Marie Eveillard, Cliff Asness, and Tom Gayner were also bullish about Wal-Mart.

So, what is it about Wal-Mart? Is Wal-Mart a good investment? Or, is it just a long position that will pay off only for those that bought in early?

In the following paragraphs, we are going to discuss Wal-Mart in detail and decide whether investors should adopt positions in the company.

Wal-Mart operates both domestically and internationally. Over the past year, the company’s sales in US were about $264 billion, with $126 billion coming from international sales. We expect those numbers will increase considerably over the next couple of years, thanks to economic uncertainty (people are trying to save their pennies) and growing demand in US. Wal-Mart is expanding and improving the selection of merchandise in its domestic stores, while, at the same time, implementing an aggressive pricing strategy. We believe these actions will increase the number of customers and boost the average transaction sizes.

We also think Wal-Mart will experience strong growth in its international business. The company is planning to shift its business from domestic markets to international markets in 2012. Wal-Mart operates nearly 1 billion square feet globally, and it has been focusing on increasing the square footage. Historically, the company grew its square footage by at least 8% per year. In 2012, the company announced that it plans to slow the square footage growth in the US market and accelerate the growth in foreign countries. It also decided a few years ago to refocus on maximizing returns on invested capital rather than maintaining the 8% growth target.

This shift in the focus will lead to lower capital expenditure, as Wal-Mart will not add a new warehouse for a location until the volumes of that store is maximized. As the capital expenditure is lower, we think the company will be able to use its cash flows to make acquisitions, raise dividends, and repurchase shares.

One of the ways Wal-Mart is growing is through acquisitions. Wal-Mart bought South Africa wholesale and retail operator Massmart and United Kingdom operator Netto Food Stores Limited in 2010. It also purchased Bounteous Company Limited in late 2007, an operator of over 100 hypermarkets in China. These acquisitions drove Wal-Mart’s recent international growth and will likely continue to do so going forward. We expect Wal-Mart will continue making acquisitions internationally over the next few years to further boost its growth in the global markets.

In addition to growth, Wal-Mart has an impressive dividend to consider. While the actual yield of dividend is just 2.6% – decent but not extraordinary – its track record is. Over the past 37 years, Wal-Mart raised its dividend payments every year, most recently moving in 2011, from a quarterly dividend of $0.3025 per share to $0.3650 per share. We believe Wal-Mart still has the ability to further raise its dividends in the future. The company’s earnings are expected to grow at over 10% per year over the next couple of years. This means Wal-Mart will be able to increase dividends as long as the company keeps its payout ratio constant. The company’s low payout ratio of 32% also indicates that it has the capability to maintain or increase its dividends even if Wal-Mart’s earnings fail to grow as fast as expected.

We are also encouraged by the company’s share repurchase history. In June 2011, Wal-Mart announced that its board of directors has approved a new share repurchase plan of as much as $15 billion worth of its shares. The buyback plan replaced its previous $15 billion repurchase, which was announced in June 2010. Under the previous repurchase program, Wal-Mart has bought back nearly $13 billion worth of shares. Obviously, the active share buyback program will boost Wal-Mart’s EPS and benefit the shareholders.

Wal-Mart looks relatively undervalued compared with its peers – Costco Wholesale Corporation (COST) and Target Corp (TGT). Currently, Wal-Mart is trading at $61.14 per share. The company made $4.48 per share over the past 12 months, so its current P/E ratio is 13.6, versus 13.7 for Target and 25.4 for Costco. Analysts expect Wal-Mart to make $4.85 per share in 2012 and $5.29 per share in 2013. Therefore, Wal-Mart’s P/E ratio for 2013 is 11.6, versus 12.1 for Target and 20.9 for Costco.

While Costco has an earnings growth expectation of 14%, which is relatively higher than the 12% for Target and the 11% for Wal-Mart, we do not think the price premium is worth paying. Target is positioned similarly to Wal-Mart – it also has a dividend yield of above 2% and has been raising its dividends for 44 consecutive years – but we think that Wal-Mart is the better deal.

Hedge funds seem to agree. Of the 350+ hedge funds we track, more hedge funds were bullish about Wal-Mart and Target than Costco. There were 34 hedge funds with Target positions in their 13F portfolios at the end of 2011, versus 26 hedge funds for Costco.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!