Investing in high quality businesses when they are at their maximum historical dividend yield tends to produce fantastic long-term results.
Wal-Mart’s price has declined 11.1% in the last week. Some of this decline is due to the market panic we have seen in recent days. Still more of the decline is due to Wal-Mart’s weak earnings results which the company recently released.
Wal-Mart’s reduced its guidance for its full fiscal year from a range of $4.70 – $5.05 to a range of $4.40 – $4.70. The decline is due to:
- Higher than expected employee compensation (due to wage increases)
- Higher than expected ‘shrink’ (basically, inventory theft)
- Lower than expected pharmacy reimbursements
Despite the negatives, Wal-Mart has turned the corner in the United States – the company delivered 4.8% sales growth in the United States in its most recent quarter.
Comparable store sales grew 1.5% overall. Neighborhood market comparable store sales grew over 7%. Positive comparable store sales growth shows that more people are choosing to spend money at Wal-Mart.
The recent guidance reduction gives investors an excellent entry point into Wal-Mart. Wal-Mart is uniquely situated to perform well if we enter into a global recession.
Great Recession Performance
Wal-Mart performed exceptionally well during the Great Recession of 2007 to 2009. The company’s earnings-per-share each year through this difficult time are shown below:
- 2007 earnings-per-share of $3.16
- 2008 earnings-per-share of $3.42
- 2009 earnings-per-share of $3.66
For comparison, take a look at the earnings-per-share of the S&P 500 over the same time period:
- 2007 earnings-per-share of $75.20
- 2008 earnings-per-share of $16.89 (ouch!)
- 2009 earnings-per-share of $56.33
As you can see, Wal-Mart rolled through the Great Recession as if it didn’t’ even happen. The average business in the S&P 500 suffered significant earnings declines.
The reason Wal-Mart Stores, Inc. (NYSE:WMT) did so well during the Great Recession is its reputation for low prices. When hard times set in, consumers stretch their dollars farther. Wal-Mart has a reputation for selling merchandise at ‘every day low prices’.