Walmart Inc. (WMT, Financial) is an American multinational that operates a chain of hypermarkets, grocery and discount stores. The stock could face a period of systemic headwinds, making it a pure dividend opportunity for a good while.
Economic concerns
Consumer discretionary and staples have performed well throughout 2020 and for most of 2021 as stimulus checks and economic recovery spurred on consumer confidence. But marginal utility theory says that when consumers spend aggressively, the desire to spend decreases up to the point where big spenders become savers; this is why there's something such as cyclicality.
I dislike bringing the inflation topic into this because I feel it's an overused word lately. We need to remember, however, that inflation erodes spending power, and there's no longer anticipation of higher inflation but rather an arrival of it. I believe this, along with the decrease in disposable income and the recent reluctance of individuals to return to the jobs market, may spell trouble for consumer discretionary stocks.
Source: St. Louis Federal Reserve.
Valuation and technical levels
I've already discussed Walmart's idiosyncrasies and its changing business dynamics, so I will delve into price action instead.
Walmart stock has a 14-day relative strength index above 70.00, indicating it's an overbought stock. I suspect this is due to investors wanting to load up on shares prior to its Nov. 16 earnings release, which I'm not saying will come out weak, but I expect a sell-off soon after the ex-dividend date.
If we examine the price-earnings ratio chart, Walmart stock usually follows the price-earnings as a leading indicator, but this was omitted in 2020 and most of this year due to an excessive amount of consumer and investor liquidity in the U.S. market. Walmart's price-earnings ratio is currently trading 10.10% above its five-year average, while its PEG is trading 20.42% below its required price-to-company growth threshold.
Dividends
In terms of dividends, Walmart is still solid. If 48 consecutive years of payout increases don't say enough, a cash per share ratio of 8.18 and a dividend coverage ratio of 23.22%, which is higher than its five-year average, consolidate the argument.
Final word
I'm not saying that Walmart is a short-sell opportunity because, let's be honest, you could just as well be shorting risk-free government bonds with its low volatility. My argument is the stock will probably experience a slight drawdown and cyclicality may cause it to become an unattractive option to most money managers. However, dividends can never be called into question; it is, therefore, a dividend pure-play.
