Walmart (WMT) might be making happy headlines for expanding healthcare and other benefits to same-sex partners, but investors still have little to cheer about.
So far this year, the stock has been a notable laggard. While the S&P 500 has gained more than 15% in 2013, Walmart has climbed less than 6%. And worse, it’s flat for the past 12 months.
Which raises an obvious question: Should you buy Walmart stock? To decide, let’s take a look at the pros and cons.
Stability: With Walmart, you know what you’re getting: a slow-but-steady retail powerhouse. Walmart, which has been around for half a century, is the largest retailer in the world by sales. It has increased revenues, profits and earnings per share for the past two decades running. It posted earnings growth of nearly 10% annually during the past half-decade, and is slated to do the same for the next five years. All in all, it’s a pretty safe bet that Walmart will keep chugging for decades to come.
Returning Capital: Walmart sure is good about using cash to reward shareholders. During the past five years, the retail giant has reinvested $68 billion of its cash flow from operations, paid out $23 billion in dividends and bought back $39 billion in shares. Walmart has been paying a dividend since 1973, and its current payout — 47 cents, yielding 2.6% — is more than double what it was five years ago. For the cherry on top, Walmart sits on $9 billion in cash and short-term investments, and recorded $26 billion in operating cash flow for 2012, which all but guarantees those rewards will keep coming.
Always Moving: The retailer might be big, but it’s never sitting still. Walmart has been busying introducing new technologies, including a “Scan & Go” app for the Apple (AAPL) iPhone, to help keep its store efficient. Meanwhile, it’s also been investing heavily in e-commerce to fight against rivals like Amazon (AMZN) and eBay (EBAY). To that end, it also has begun testing lockers for online orders earlier this year.
Tepid Consumers: While Walmart’s strong foundation is nice, it’s doesn’t change the fact that consumer spending seems to be facing some headwinds. WMT has posted same-store sales drops for the last two quarters, blaming everything from hiked payroll taxes to higher gas prices to weather. Walmart doesn’t expect things to get better soon — it lowered its full-year forecast in August — and retailers across the spectrum have nodded to similar struggles. Plus, many believe that Walmart’s low-income consumers are more easily pinched when times are tough.
Controversy: People love to hate Walmart. This week, low-wage workers — mostly from fast-food companies like McDonald’s (MCD), but also from the retail sector — are taking to the streets in protest of their low wages, re-igniting criticism about Walmart’s cheap pay. On top of that, the company faced bribery investigations in Mexico, is often accused of being bad for local business … and the list goes on. While WMT has thrived despite a bad reputation for some time, you never know whether the next new scandal will be the one to break the camel’s back.
Expansion: Walmart has struggled to continue expanding its store count, both in domestic urban areas and overseas. Washington, D.C., for one, passed a “living wage” bill despite an ultimatum from WMT that it would cancel half its planned new stores if the bill went through. The retailer also has faced opposition when trying to open city stores in New York. Meanwhile, Walmart put its expansion plans into India on hold thanks to “two compliance investigations and unease over the government’s rules for foreign investment in retail businesses,” according to The Financial Times. When you’re a giant, growing isn’t easy.
Walmart stock has been notably sleepy lately, and the broader economy gives us little indication that will change anytime soon. And despite its underperformance, WMT still doesn’t look like a bargain.
The stock’s trailing P/E sits at 14, which is right in line with its five-year average. And its forward P/E is 13 — in line with rival Target (TGT), but higher than other plays in the retail sector like Macy’s (M) and Kohl’s (KSS). Factor in growth — Walmart’s current PEG is north of 1.5 — and things look even worse.
So should you buy Walmart stock? No — while I think concerns about spending and the retail sector might be overblown, and while I think Walmart is still a solid long-term stock, I wouldn’t buy it now.
As of this writing, Alyssa Oursler was long MCD.