The United States is a consumption driven economy and the economy is likely to be driven by the consumption factor (discretionary and non-discretionary) in the years to come. Therefore, consumption related stocks should be a part of the long-term portfolio and there is no better name than Walmart (WMT, Financial) in this segment.
Things have not been smooth for Walmart in 2015 with the stock declining from a January 2015 peak of $90.5 to current levels of $73.7. The first reason for decline in Walmart stock was weak retail numbers in the GDP for the first quarter of 2015. Wage hike, strong competition has been among other factors that have resulted in decline in Walmart.
However, the advanced monthly sales numbers for June 2015 and April to June 2015 was released today and there are positive factors in the report. For June 2015, retail sales declined by 0.3% as compared to May 2015. This number disappointed, but for the quarter April to June 2015, total retail and food & service sales jumped by 1.7% as compared to the prior year comparable quarter. Therefore, second quarter contribution by the retail sector to GDP growth is likely to be strong and the quarter is expected to be good for retail companies as well.
Walmart, which is trading near 52-week lows, is therefore a good stock to buy before the company declares its quarterly results. At a trailing twelve month PE of 14.8 and a good dividend yield of 2.7%, Walmart is a value investment in my opinion. Before I talk about some positive factors for Walmart besides the strong retail sales in the second quarter, I would like to stress that Walmart is not a growth stock but a dividend stock. The approach to investing has to be dividends and value through share repurchase than expecting strong top-line and bottom-line growth.
However, there are some segments within Walmart that will experience high growth and can positively impact the company’s margin in the long term. In the first quarter of 2015, the company’s e-commerce sales increased globally by 17%. Walmart already has ecommerce websites in 11 countries and I expect strong growth from this segment.
Walmart has been making efforts to build the ecommerce business through investments and compete with the likes of Amazon (AMZN, Financial) through offering of deep discount in their ecommerce site. The reason for focus on ecommerce is obvious with U.S. eretail sales expected to grow at a compound annual growth rate of 9.5% through 2018.
Walmart has strong financial flexibility and can make big investments in the segment and the company’s ecommerce sales growth is likely to be well over 10% (CAGR) through 2018. Further, ecommerce sales in high growth markets like China and India can also add to the company’s revenue.
The reason to focus on e-commerce is not to say that Walmart’s revenue growth will change significantly just from one small segment. However, the segment initiatives show that Walmart is evolving with time and according to consumer preferences. This fact will help the company survive in a competitive market.
Another reason that Walmart might have declined in 2015 is the fact that the new CEO who assumed chair on February 2014 has been more conservative in dividend increase as compared to the previous CEO. However, during the last 12-15 months, Walmart has accelerated investments in the e-commerce sector and the wage hike has also impacted the potential for dividends. In my opinion, these are near-term factors and the long-term growth trend for dividends will continue.
Walmart generated free cash flow of $2.2 billion for the first quarter of 2015 and if this level of free cash generation continues, strong dividends will also flow. Therefore, investors should buy Walmart as a dividend stock and as a stock that can create value through share buybacks. The company’s ecommerce growth over the next 3-5 years will be strong and it will ensure that consumer engagement remains high.
Walmart correcting by 14% in 2015 is very significant as the stock has a low beta of 0.75 and is also trading at attractive valuations. In my opinion, this correction is a good buying opportunity and from these levels, the stock can also provide decent capital appreciation returns besides continued dividends.
