Published Jan. 7 by Bob Ciura
The internet changed the world. Nowhere is this more evident than in the retail industry, where Amazon.com (AMZN, Financial) seems to be unstoppable.
Amazon is racking up revenue growth and taking market share at a torrid pace. Consumers love the convenience of at-home shopping, often at lower prices than physical retailers can offer.
For evidence of Amazon’s success, look no further than its share price. Amazon stock has skyrocketed 330% in the past five years.
But therein lies the problem, at least for income investors. Amazon stock does not pay a dividend, and never has.
By comparison, Walmart (WMT, Financial) is one of only 50 Dividend Aristocrats. These are stocks with over 25 years of consecutive dividend increases that are also members of the S&P 500. You can see the entire list of all 50 Dividend Aristocrats here.
Walmart has raised its dividend each year for 43 years in a row.
For those looking to gain exposure to the retail industry, this article will discuss four reasons why I prefer Walmart Stores (WMT, Financial) over Amazon.
Reason #1: Dividends
The most obvious advantage that Walmart offers to income investors is its dividend. Walmart has an impressive dividend growth history. It paid its first quarterly dividend in 1974 at a rate of a nickel per share.
Its dividend has grown 10-fold in the span of those 43 years. Today, Walmart pays 50 cents per share each quarter. Its $2 per-share annualized payout provides a 2.9% dividend yield based on its current share price.
To be sure, Amazon stock has richly rewarded its shareholders. The main reason why Amazon stock has gone on such a huge rally over the past several years is because its revenue growth has exploded.
From 2011 to 2015, Amazon’s revenue grew at a 17% compound annual rate. According to the company, Amazon was the fastest company in history to reach $100 billion in annual revenue.
But Amazon has to spend a great deal in order to generate this revenue growth. One of the most appealing parts of shopping on Amazon is that products are often cheaper than at brick-and-mortar stores.
Amazon under-cutting competitors on price allows it to take market share at a cost to margins. This is why Amazon does not pay a dividend.
Reason #2: Profitability
The reason why Walmart is such a strong dividend payer is because of its profitability. Walmart is much more consistently profitable than Amazon, which only recently achieved positive EPS.
Walmart has significantly higher margins than Amazon.
For example, Walmart earned net income of $9.9 billion, and $354.94 billion of revenue, through the first three quarters of 2016. As a result, Walmart’s profit margin was 2.8% over the first nine months of the year.
Meanwhile, Amazon earned net income of $1.6 billion, on $92.23 billion of revenue, in the same period. Amazon’s profit margin was 1.7% in the same period.
This demonstrates how much more profitable Walmart is than Amazon. Put differently, Walmart earns approximately 65% more profit for every dollar of sales. And margins matter.
Walmart is so highly profitable that it can also repurchase its own stock. As of the end of the third quarter, Walmart utilized approximately $8.7 billion of its current $20 billion share repurchase authorization.
Lowering its share count eases the financial burden of Walmart’s dividends.
But Amazon does the opposite; it is issuing more shares.
Source: Q3 Earnings presentation, page 6
This is dilutive to shareholders.
Amazon needs to reinvest huge financial resources back in the business in order to keep growing revenue. This has worked well, in the sense that its revenue has soared.
But there is not much left over to pay dividends. By the same token, Walmart paid $1.5 billion of dividends to shareholders last quarter—almost as much as Amazon earned in profit through the first three quarters combined.
Reason #3: Valuation
Walmart is a more suitable stock than Amazon because of its cheaper valuation. Value investors look for stocks trading at or below their intrinsic value. This is the approach that made Warren Buffett (Trades, Portfolio) one of the most legendary investors of all time.
Buying stocks when they’re cheap can help provide investors with a margin of safety. Over-valued stocks can come crashing down if their growth rates do not keep up with expectations.
Walmart provides a margin of safety, since its stock is reasonably valued. Walmart trades for a PE ratio of 15.
This means that at the current share price, investors are paying $15 for every $1 of earnings.
For its part, Amazon stock trades for a PE ratio of 182. Amazon’s lofty valuation does not provide much of a margin of safety.
Expectations are very high for Amazon. This has done wonders for the share price, and investors have reaped the rewards. But it also raises the bar going forward.
If Amazon does not keep growing revenue fast enough to meet expectations, investors could rush for the exits.
By comparison, Walmart’s rock-solid profitability provides a firmer floor for its earnings, and by extension its share price.
Reason #4: Walmart fights back
The final reason why I prefer Walmart over Amazon is that things might get tougher for Amazon going forward.
Amazon rose to prominence due to the boom in internet retail. But this could be about to change, as Walmart is moving swiftly into e-commerce to make up for lost time.
Walmart’s e-commerce sales more than doubled from 2013 to 2016.
Walmart’s global e-commerce sales rose 20% last quarter. Last quarter, Walmart’s total comparable sales rose 1.2%; e-commerce represented 0.50% of this growth.
E-commerce will be an emerging growth catalyst for Walmart moving forward. Its pursuit of Amazon in this area will be supplemented by its $3.3 billion acquisition of Jet.com.
Source: 2016 Investor Meeting Presentation, page 4
Final thoughts
Amazon stock has a market capitalization of $378 billion, while Walmart’s market cap is $210 billion. This might make it seem like Amazon dominates Walmart in retail, but that really isn’t true.
Instead, the truth is that Walmart generates nearly four times as much revenue as Amazon, and more than six times as much profit.
Amazon’s market capitalization is the result of its soaring share price. But when a share price takes off like this, expectations rise as well.
Going forward, Walmart has the financial resources to compete directly with Amazon in e-commerce, and it’s not backing down.
Walmart may not be as exciting as Amazon, but it offers a high level of profitability and a rock-solid dividend. This makes it the better pick for income investors and highly ranked stock using The 8 Rules of Dividend Investing.
Disclosure: I am long WMT.
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