Monday, March 16, 2009

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

This article originally appeared on The DIV-Net March 9, 2009.

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 North America. The company operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International.

Fair Value: I consider 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 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, WMT is trading at a 13.0% discount. WMT earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
WMT earned one Star in this section for 3.) above. WMT has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 35 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)? 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
WMT earned one Star in this section for 1.) above. The NPV MMA Diff. of the $4,553 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as WMT has. If WMT grows its dividend at 11.3% per year, it will take 7 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.3%.

Other: WMT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. WMT is the dominant retailer in North America with the leading position in most markets. The company is typically the price leader and generates strong cash flows. Given its discount focus, it is well positioned to gain market share in the current adverse economic environment. WMT is growing internationally via acquisitions and joint ventures. Inroads have been made in China, India and Japan. Risks include rising unemployment, lower consumer confidence and unfavorable foreign currency exchange rates.

Conclusion: WMT earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks WMT as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $54.92 before WMT's NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 1.98%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 9.9%. This dividend growth rate is below the 11.3% used in this analysis, thus providing a margin of safety. WMT has a risk rating of 1.25 which classifies it as a low risk stock.

I had not purchased any WMT shares since December 2007 due to its low yield (less than 2%) and its lower than normal 2008 dividend increase (8.2%). This all changed after WMT's recent 15% dividend increase. On March 6th, after watching WMT's stock pull back all day, I tripled my position in it to nearly my full allocation. I will additional purchases at prices below $54.92, as my allocation allows. For additional information, including the stock's dividend history, please refer to its data page.

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 (4.8% of my Income Portfolio).

What are your thoughts on WMT?

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