Thursday, June 28, 2012

Wal-Mart Stock and Dividend Growth

Wal-Mart is an interesting story stock lately. While I'm not suggesting it as a short term buy, it does have a lot to say about long term investing in safe, defensive, stable, well managed, well financed  and dividend growing blue chip companies. And what they do is easily understandable to the individual investor as well.

It's one of those buy it, "put it in the drawer" and then forget it for a decade or so stocks. The past ten years hasn't been kind to investors, but what about Wal-Mart, as an example?

Wal-Mart Stock Near All-Time High says this in part:

"Wal-Mart Stores . . . which once advertised "always low prices," clearly wasn't referring to its stock.

Shares of the world's largest retailer have raced ahead of the broader market in the past few months, nearing their all-time closing high of $69.69, set in 1999. The ascent is the latest sign of stock investors' appetite for defensive plays, such as the big retailer with its steady cash flow and regular dividends. . . .

The prospects for further gains are debatable. Bulls point to the better-than-expected quarterly results Wal-Mart reported last month as well as a price-to-earnings ratio that remains relatively modest....
The stock has jumped 12% over the past three months . . . .

The retailer's price-to-earnings ratio has risen to 14.8 from 11.7 a year ago and this month hit a high of more than two years, according to FactSet. That indicates the stock has gotten pricier, with investors paying more for the profit the company generates.

But Wal-Mart's price-to-earnings ratio remains below its average over the last 15 years and little slightly above that of the S&P 500.

Consumer-staples companies have proven resilient in recent months. Some investment strategists have recommended sticking with defensive stocks amid uncertainty about Europe's debt crisis and signs of the U.S. and Chinese economies slowing down.

Such a strategy might benefit Wal-Mart, which has quintupled its annual dividend over the past decade, including a 9% increase this year in the payout, to $1.59 a share. The retailer has also been active in buying back its shares. As of the end of April, it had spent more than a third of the $15 billion its board authorized for share repurchases in July 2011. . . .

The median price target of analysts who follow Wal-Mart is $67.50, according to Thomson Reuters, leading many analysts to give the shares a "hold" rating.
A Wal-Mart spokesman declined to comment on the company's stock price."

My Take

Wal-Mart is a solid company with sound finances and a proven track record of increasing cash dividends annually.

While the price of its stock is no higher than it was in 1999, neither is it lower. And its dividend payment per share has quintupled over the past ten years, including a 9% hike this year.

Stock analysts typically recommend stocks based on the anticipated performance over the next six to twelve months. To me that short term trading mentality is just plain silly.

Who knows what will happen to the price of a stock over a short period of time?  Nobody.

But for those of us willing to buy and hold for a long time shares of rock solid companies that yield more than 2% currently (Wal-Mart's yield is now 2.34%) and are expected to increase their dividends over time, what's not to like?

Besides, Wal-Mart's stock will likely trade meaningfully higher in future years than it does today.

Here's a 1-2-3 Comparison

(1) Ten year government bonds yield 1.6% currently. Wal-Mart's dividend yields 2.34% right now.

(2) And that government bond won't increase its interest payment on that bond during the next ten years, whereas Wal-Mart almost certainly will at least double its dividend payment.

(3) And if interest rates rise at all during the next ten years, that bond won't be worth what is is today.

On the other hand, Wal-Mart's share price will likely be 50% to 100% higher a decade from now. And if it isn't at that time, you will likely have had multiple chances to sell it before then and receive a much higher price than it's selling for today.

Summing Up

Lots of other blue chip companies exhibit the same characteristics as Wal-Mart.

While there are no guarantees, of course, you can't steal second with your foot on first.

Stay away from buying bonds and carefully consider buying blue chip stocks with that money.

Thanks. Bob.

No comments:

Post a Comment