Walmart (WMT) doesn’t need much explaining. The retail giant is the biggest company on earth in terms of revenues.
To put Walmart’s size into perspective, 90% of Americans live within 10 miles of a Walmart store. If the company were a country, it would rank 24th in terms of its sales against other countries’ GDP.
As the company has been expanding throughout the decades, its investors have been rewarded greatly in the process. While Walmart has been known among investors primarily as a dividend-oriented stock, boasting 48 years of consecutive annual dividend increases, the company has recently turned its focus towards growth.
Future earnings are likely to grow faster as a result. Still, the stock remains relatively attractively priced. I am bullish on the stock. (See WMT stock charts on TipRanks)
E-commerce a Strong Growth Catalyst
Walmart has lately been concentrating its efforts to grow its online sales. While Amazon (AMZN) reached a dominant position in that space long ago, Walmart has a great advantage.
The company should be able to leverage its massive logistics network, and the myriad of retail locations, to actively compete in delivery times and pricing.
Over the past couple of years, Walmart has posted solid e-commerce and omnichannel growth numbers. The COVID-19 pandemic has further boosted Walmart’s online sales, as well.
In its Q2 results, the company revealed that its e-commerce sales had grown by 103% compared to two years ago. Its Sam’s Club e-commerce sales also grew by 27% year-over-year.
The company also expects its online sales to reach $75 billion by FY2022. That should represent just over 13% of its total sales, at the current total annual sales run-rate of around $570 billion.
As e-commerce sales continue to grow, it’s quite likely that Walmart’s margins will also improve, as the company cuts down on the frictions and additional costs related to retail sales. Hence, profitability should also expand.
Dividend Growth And Valuation
As mentioned, Walmart features one of the longest dividend growth track records, currently counting 48 consecutive annual hikes. However, as the company keeps investing aggressively in e-commerce infrastructure and overall initiatives (e.g., the company is planning to revolutionize access to affordable insulin), dividend growth has slowed down over the years.
Specifically, since 2014, Walmart’s annual DPS hikes have been weaker year after year. The latest DPS increase back in February was by just 1.9%. Management expects the company to deliver EPS of around $6.20 to $6.35 for the full year.
This implies a payout ratio of under 35% at Walmart’s current annual dividend rate. Hence, it’s not an issue of affordability, but mostly strategy on capital allocation.
In terms of its valuation, Walmart is currently trading at a forward P/E of 21.9, which should be considered reasonable. Walmart has a massive moat, and is not going anywhere anytime soon.
Hence, lots of investors should be willing to pay a small premium for its shares. As long as the valuation remains fair, Walmart should keep repurchasing shares as well. In the first half of the year, the company had repurchased $5.2 billion in shares, which amounts to around 25% of its $20-billion authorization program.
Turning to Wall Street, Walmart has a Strong Buy consensus rating, based on 18 Buys, four Hold, and zero Sells assigned in the past three months. At $172.48, the average WMT price target implies 19.6% upside.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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