Walmart stock (NYSE:WMT) has hit a bit of a rough patch lately, with earnings worries alarming investors. The company’s revenue growth has been struggling to keep up with the rate at which expenses have been growing. As a result, the company’s margins have shrunk, and its earnings have declined. Hence, Walmart’s shares appear to have flipped on the expensive side, especially since there isn’t a promising outlook for earnings growth in the near future.
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That said, it’s not all doom and gloom for Walmart. The company has announced its 50th consecutive annual dividend increase, which is music to the ears of income-oriented investors. As dividend investors continue to accumulate shares, it’s possible that Walmart’s current valuation will remain elevated, causing the stock to continue to trade flat.
Overall, I’m feeling pretty neutral about Walmart stock. While the recent dividend news is certainly exciting for some investors, the company’s lack of earnings growth potential makes me hesitant to give it a strong endorsement.
Lack of Earnings Growth Induces Worries
Recently, Walmart has been confronted with a major hurdle in terms of its earnings growth. Although management’s efforts to navigate through the challenging market conditions are commendable, the company has struggled to keep up with the incessant escalation in labor and product costs.
It’s not that Walmart’s management has been incompetent. In fact, given the circumstances, I would argue they have done an excellent job. However, due to the necessity of offering higher wages to retain and satisfy employees in a tight labor market while keeping prices affordable for consumers, it has become increasingly challenging to grow profits. This was illustrated in the company’s fiscal Q4 and full-year results, which came in mixed.
Sales Growth is Praiseworthy…
In terms of sales, the numbers were strong. For the quarter, the company posted sales of $164 billion, up 7.3% year-over-year or 7.9% in constant currency. Specifically, comparable sales in the U.S. were up 8.2%, effortlessly beating the consensus estimate of 6.9%. In fact, it’s worth mentioning that December was the largest sales month in Walmart’s U.S. history, indicating strong consumer purchasing power.
The company’s E-Commerce segment also saw significant growth, with sales up by 17% and the company continuing to gain market share in online grocery sales. Sam’s Club also performed well, delivering comparable sales growth of 12.2% or 22.6% on a two-year stack, with its member count hitting a new all-time high.
….But Growing Expenses are Hard to Control
Despite Walmart’s robust sales, controlling expenses in the current market environment has been a real challenge. The two primary drivers of higher expenses are labor costs and more expensive product sourcing.
Regarding labor costs, worker pay averaged close to $17.00 an hour during 2022, which is the result of five rounds of wage hikes that began in 2015. Then, back in January, Walmart announced another raise in its minimum wages as the company keeps grappling with a tight retail labor market.
Thus, the company’s average worker pay is set to increase even further this year, and given the labor-intensive nature of its business model, this can have a significant effect on Walmart’s earnings. For context, Walmart is the largest employer in the world, having a staggering 2.3 million employees. Hence, a company-wide wage increase can have an immense effect on margins.
And then, there is inflation, which has eased in the past few months but remains quite elevated on a historical basis. Walmart has strived to maintain low prices to keep attracting foot traffic, and in that regard, it has succeeded, as illustrated in its sales.
However, as its cost of goods has grown disproportionally compared to its shelf prices, its margins have softened. In fact, in Q4, gross margins were 23.5%, the lowest for Walmart in 16 years, while its EBITDA margins were 5.1%, the lowest in the past two decades (as far as the data goes back).
Dividend Enthusiasm to Sustain Valuation
Walmart’s valuation appears to be quite elevated, given the lack of earnings growth. In particular, due to a decline in margins, as mentioned earlier, full-year adjusted earnings per share came in at $6.29, falling from last year’s $6.46. Consensus earnings-per-share estimates for Fiscal 2024 point toward a further decline to $6.15, implying shares are currently trading at a forward P/E of 22.8. That’s a very rich multiple with interest rates on the rise and no visibility regarding when earnings growth will resume.
However, Walmart’s valuation is likely to be sustained by income-oriented investors and funds, with the company hitting a new status in the space. Specifically, along with its Q4 results, Walmart announced its 50th consecutive annual increase, entering the elite class of Dividend Kings (companies that feature 50+ years of consecutive dividend increases).
While the stock’s yield may be very light at 1.7% in the interest rates landscape, the upcoming headlines regarding the company’s new dividend status should nevertheless drive dividend investors and related funds to keep accumulating shares.
Is WMT Stock a Buy, According to Analysts?
Turning to Wall Street, Walmart has a Strong Buy consensus rating based on 21 Buys and four Holds assigned in the past three months. At $162.79, the average WMT stock price target implies 15.7% upside potential.
The Takeaway
In conclusion, Walmart’s recent sales growth is noteworthy. Still, the company’s struggle to control growing expenses and lack of earnings growth visibility makes it difficult, in my view, to give a bullish rating.
However, Walmart’s new status as a Dividend King, with 50 consecutive annual dividend increases, may sustain its elevated valuation among income-oriented investors and income-focused funds.
