Wal-Mart (WMT, Financial), which currently offers a dividend of $2.04 per share and a dividend yield of 2.9%, is among the top picks for dividend portfolios. There are multiple reasons to be bullish on this retail giant.
One of the key stock upside triggers for Wal-Mart is its push toward the e-commerce business. In addition, market valuations currently seem stretched, suggesting it might be time to shift from high beta stocks to low beta ones.
E-commerce acquisitions
Wal-Mart acquired Moosejaw, a leading online outdoor retailer, on Feb. 13 for $51 million. The acquired company has an online presence as well as 10 physical stores. Moosejaw has an extensive assortment of apparel and gear for climbing, hiking, camping, snow sports, yoga, swimming and biking. It also acquired Jet.com for $3.3 billion in 2016.
On March 17, the company announced it was acquiring fashion retailer ModCloth. A majority of ModCloth's sales are online as it has only one physical store.
These acquisitions indicate Wal-Mart is focusing on e-commerce to drive its growth going forward, an area it has been aggressively pursuing.Â
Wal-Mart's e-commerce growth for fourth-quarter 2016 was encouraging with sales and GMV increasing by 29% and 36%. With organic investments as well as inorganic growth, I believe strong momentum is likely to sustain.
Launch of innovation hub
In addition to its multiple acquisitons, Wal-Mart is launching an innovation hub to identify the ideas, people and technologies that will drive the future of retail. The investment arm will be called Store No 8.
This initiative further underscores the point Wal-Mart is eager to make strong inroads in the e-commerce sector. Instead of relying on inorganic growth , the company is keen on edging ahead of peers through technological capabilities.
I see this innovation hub as a key growth driver for the company in the long term. The segment will also work in areas like robotics, virtual and augmented reality, machine learning and artificial intelligence.
Pricing war
The Federal Reserve has been increasing interest rates, which is indicative of sustained stability in the U.S. economy. With the consumer sector being important for economic growth, I believe sentiments will remain positive for retailers even after the relatively disappointing sales in the fourth quarter.
With a significant number of physical stores, however, there is pricing war among big retailers, which can impact margins in the medium to long term. Wal-Mart also faces competition from smaller discount store chains.
One of the advantages Wal-Mart has is its financial muscle. This has already helped the company make inroads in the e-commerce sector. Going forward, I believe Wal-Mart will take a hit on key margins to retain market share, which is potentially factored into the stock price.
Conclusion
Wal-Mart is aggressively pursuing its e-commerce business. With a focus on inorganic growth and innovation, the company is likely to keep pace with competitors in the sector.
While physical stores will see pricing pressure, the company is still well positioned to take some margin hits and retain market share.
I believe the stock is attractively priced at current levels and can be considered a good dividend investment. Further, Wal-Mart’s e-commerce segment will likely grow in the coming years and add to shareholder value.
Disclosure: No positions in the stock.
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