Wal-Mart Stores, Inc. (NYSE:WMT) is one of the most successful companies in U.S. history. I am still amazed at how Wal-Mart grew from only one small grocery store in Arkansas into a global retail giant consisting of over 10,000 stores. Wal-Mart’s stock has been equally as impressive, increasing from a split adjusted $0.06 per share in 1972 to a close of $69.12 at the end of 1999. After this amazing run, Wal-Mart was due to cool off for a while, and did it ever! Over thirteen years later, Wal-Mart is currently trading at almost the same identical level as the 1999 closing price.
It does not take a rocket scientist to realize that the early 2000s were not the best time to buy Wal-Mart. At the beginning of 2000, the P/E ratio was near 70 and the dividend yield was only 0.29%. These numbers are looking much better now with a P/E ratio of 14 and a dividend yield of 2.3%. Since the start of this century, the share price has been flat, while annual revenues have tripled from $138 billion to $464 billion, and net income has increased from $4.43 billion to $16.59 billion.
Wal-Mart has increased its dividend every year since initiating it in 1974 and is a component of the Dividend Aristocrat Index, which consists of companies within the S&P 500 with consecutive annual dividend increases of at least 25 years. Over the last decade, Wal-Mart’s annual dividend has multiplied by 4.42 times, from $0.36/share to $1.592/share. If the dividend is increased at this same level during the next ten years, the effective dividend yield would be 10.1%. Taking this one step further, if the dividend is increased at this same level for two decades, your effective dividend yield would be 44.6%, which means that in twenty years you would be receiving $446 annually for every $1000 invested today. By combining this with dividend reinvestment and capital gains, you could potentially have phenomenal returns by investing in Wal-Mart today. Of course, future dividend increases are not guaranteed, but with a payout ratio of only 32%, Wal-Mart’s impressive dividend history should continue for many years.
On-Line Retail – Threat or Opportunity?
Amazon.com, Inc. (NASDAQ:AMZN) is the king of on-line retail, with annual revenues of $61 billion. There are a large number of investors that believe that Amazon’s on-line dominance will lead to the eventual downfall of Wal-Mart. I agree that Amazon is a great company as well as a great growth stock, but I think that Amazon and Wal-Mart can both triumph. There are many items that most shoppers (including myself) prefer not to buy on-line, including groceries, consumer products, and delicate items such as glass products. I believe that there will continue to be shoppers that prefer to never shop on-line, and Wal-Mart’s low prices will continue to attract these shoppers. Also, one advantage that Wal-Mart has over Amazon is returned items. If an item needs to be returned, you can take it to your local Wal-Mart instead of having to send it back to Amazon. For these reasons, I believe that Wal-Mart’s stores will remain successful well into the future.
Wal-Mart is working hard to turn the on-line retail threat into an opportunity for future growth. Their site to store service allows you to purchase items at Wal-Mart.com and pick them up at your local Wal-Mart. I have used this service on a regular basis and think that it is very convenient. Wal-Mart has made additional efforts to boost its e-commerce capabilities, such as their acquisition of a majority stake in Yihaodian, an on-line retailer in China. Wal-Mart has combined a series of additional acquisitions to create Wal-Mart Labs, which analyzes trends and data in an effort to anticipate consumer needs and to market products more effectively. It is evident that Wal-Mart is taking steps to develop a successful on-line retail business. If Wal-Mart is successful in this endeavor, investors will be substantially rewarded.