A reader of my recent article about Walmart (WMT) made a comment about Warren Buffett (Trades, Portfolio)’s (BRK.B) original purchase of the company’s shares back in 2005 (or at least in large enough size that it started being disclosed in Berkshire’s annual letter to shareholders). As I looked back at the data over the past decade, I found it quite interesting – and thought it would be worth discussing.
Berkshire Hathaway and Walmart
Let’s start with Berkshire’s history owning Walmart: the first time the stock showed up in the disclosed holdings in Warren’s annual letter was year-end 2005; at that point, Berkshire disclosed a nearly 20 million share stake in the company – good for roughly half a percent of the outstanding shares. The position was purchased for $944 million, or roughly $47 per share.
The position would remain unchanged for years, until 2009. When Warren published his annual letter for the year, it showed that Berkshire’s position in WMT had roughly doubled, to 39 million shares. Again, the position remained untouched for years; in 2012, Warren added another 40% to his position in WMT, bringing the total to nearly 55 million shares. He added a few million more in 2013 and 11 million more shares in 2014, bringing Berkshire’s holding in WMT to 67.7 million shares. That’s equal to 2.1% of the shares out; at a recent $75, the position is worth more than $5 billion, with a cost basis of $3.8 billion. Here’s a graph showing that data:
Walmart’s valuation
Now here’s where I think the story gets interesting. As fellow GuruFocus author Grahamites noted recently (here), strong total shareholder returns for many companies in recent years have been driven by changes in valuation (multiple expansion). He argues that this could turn out poorly for investors (“heads I lose, tails I don’t win much”); I agree with him completely.
That applies to many companies; however, we see something very different at Walmart:
The 2015 data shown above uses Walmart’s fiscal 2015 results and the recent trading level for WMT shares ($75); every other data point matches the fiscal year with the year end trading level for the stock (estimated). The one caveat that should be addressed here is that the dividend payout ratio (percentage of earnings) has increased from the low-20’s to the high-30’s over the past decade; that’s accounted for a good chunk of the higher yield (but not all).
Conclusion
For me, it’s interesting to consider that Warren Buffett (Trades, Portfolio) added more than $800 million to his position in Walmart last year at prices that are near current levels. He has owned the stock in size for a decade and appears comfortable adding more at the right price.
WMT shares are currently trading at a level that’s likely to turn out quite well for long term investors; based on my research, I think one would be hard pressed to argue that the stock has been materially cheaper more than a handful of times over the past decade. After accounting for other factors that are currently a headwind to EPS (like strategic investments in e-commerce), the picture looks even better than it appears at first glance.
Importantly, I don’t think WMT is as susceptible to the material drawdown risk that many of the better performing large cap blue chips have had built into their valuations over the past five years; as a corollary, I think it offers a more attractive expected rate of return over the next five to ten years – and with a higher degree of certainty. I'll happily take that when I can find it.
Of course, Walmart shares can always go lower in the near term – and I would be happy if they did (they’ve fallen 13% to date in 2015). If that happens, I'll be buying more; I’d be willing to bet that Warren will keep adding to his position in the company in that situation as well.
