Thursday, June 4, 2015

Wal-Mart Stores, Inc. (WMT) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Wal-Mart Stores, Inc. (WMT). Below are some highlights from the above linked analysis:

Company Description: Wal-Mart Stores, Inc. is the largest retailer in the world, Wal-Mart operates 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 premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 33.6% premium to its calculated fair value of $55.61. 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 three Stars in this section for 1.), 2.) and 3.) 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 stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. WMT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 41 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 NPV MMA Diff. of the $184 is below the $500 target I look for in a stock that has increased dividends as long as WMT has. The stock's current yield of 2.64% exceeds the 2.47% estimated 20-year average MMA rate.

Peers: The company's peer group includes: Costco Wholesale Corporation (COST) with a 1.1% yield, Target Corp. (TGT) with a 2.6% yield and PriceSmart Inc. (PSMT) with a 0.7% yield.

Conclusion: WMT did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks WMT as a 3-Star Hold stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $55.82 before WMT's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 41 years of consecutive dividend increases. At that price the stock would yield 3.5%.

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 5.0%. This dividend growth rate is significantly higher than the 2.1% used in this analysis, thus providing no margin of safety. WMT has a risk rating of 1.50 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. Including its latest dividend increase, the stock's dividend growth rate is now only 2.1%. This is the primary driver of its calculated fair value dropping to $55.61. Until this changes, I will not add significantly 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 (1.1% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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