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

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. The stock is trading at a 6.3% discount to its calculated fair value of $58.75. WMT earned a Star in this section since it is trading at a fair value.

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 two Stars in this section for 1.) and 2.) 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%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 36 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 a Star in this section for its NPV MMA Diff. of the $823. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WMT has. If WMT grows its dividend at 11.0% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.98%

Other: WMT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Conclusion: WMT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks WMT as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $63.32 before WMT's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 36 years of consecutive dividend increases. At that price the stock would yield 1.91%.

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 9.7%. This dividend growth rate is less than the 11.0% used in this analysis, thus providing a margin of safety. WMT has a risk rating of 1.00 which classifies it as a low risk stock.

WMT enjoys dominant positions in most markets where it competes. The company continues to gain market share aided by the economic downturn as consumers choose WMT over higher-cost competitors and take advantage of its convenience. Its unmatched scale leads to favorable terms on everything from the products it sells to store leases and distribution agreements. These advantages are demonstrated in the company's strong free cash flow of $3.63/share for FY 2010, up over 23% from FY 2009 and 2.7 times FY 2008's comparative number of $1.33. The company recently announced an 11% increase in its cash dividend. Though its yield of 2.2% is less than my desired minimum of 2.25%, WMT is the type of company I want to own. I plan to add to my position this month while it is trading below my buy price of $58.75. 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 (1.8% of my Income Portfolio). See a list of all my income holdings here.



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