Warren Buffett is selling down his Berkshire Hathaway Inc. (NYSE:BRK.B) position in Wal-Mart Stores, Inc. (NYSE:WMT). That’s putting pressure on WMT stock just ahead of its Nov. 17 earnings report, and forcing a lot of investors to rethink this long-term portfolio staple.
Berkshire’s stake in the giant retailer, once worth $5 billion, is now down to less than $1 billion. Buffett sold some of the shares earlier this year, then sold even more WMT stock after the company bought Jet.com for $3 billion in August.
Berkshire Hathaway first disclosed a stake in Walmart shares in 2005. With the shares then trading at $47, their value was estimated at $944 billion.
Since then, however, Walmart stock is only up 34% after peaking at around $85 in early 2015. Berkshire’s holdings in the company peaked in 2014, at 67.7 million shares, then worth about $5 billion. He began trimming the position last year as the price fell to less than $60 per share, and probably finished his sales around $70.
Buffett has at least been acquiring better dividends — Walmart’s payout has risen from 15 cents per share in 2005 to 50 cents per share more recently. And he did enjoy some capital gains in WMT stock. But should you pick up what Buffett has put down?
Walmart: Value or Value Trap?
The 18 analysts following Walmart stock are estimating that revenue for the third quarter will come in at $118.69 billion, with earnings of about $3 billion, or 98 cents per share. Most analysts only call it a hold, not a buy. WMT is expected to earn $1.46/share, about $4.8 billion, during the current quarter, which includes Christmas.
At current prices, the gains to be made here aren’t capital, but income. WMT stock currently yields 2.8% — slightly below the rate on the 30-year U.S. government bond, whose value has been falling lately (and thus whose yield is rising).
Walmart’s purchase of Jet.com occurred at the start of the third quarter, and those managers have only recently slotted into the e-commerce division’s management structure. The company has big plans but may have trouble executing all of them in time for the current Christmas selling season.
Speaking of Christmas …
The season has already begun with major retailers “leaking” their top Black Friday deals, starting with TVs. Walmart’s ad focuses on electronics and games, with more products available for in-store pick-up.
While many stores will be closed on Thanksgiving, including Walmart’s Sam’s Club warehouses, Walmart outlets will open at 6 p.m.
Walmart is emphasizing price rather than value for Christmas, which could cut results for all retailers when they report results in February. Analysts think Walmart could take up to $35 billion in sales away from its discount rivals, Target Corporation (NYSE:TGT) and Dollar General Corp. (NYSE:DG).
The bulls have an $80 price target on WMT stock, which could be great for a conservative portfolio.
Time to Buy WMT Stock?
Along with Buffett, some members of the founding Walton family have been selling shares. That has more to do with the Walton children’s aging, their interest in building their new Walton Family Holdings Trust and in keeping their total stake in the company at around 50% than a negative view of the company’s prospects.
The bottom line here is that if you are a conservative investor, if you believe in the American consumer and if you think the global economy will continue to grow in 2017, Walmart is a cheap stock to own. The recent sales have left it with a below-market P/E multiple and an attractive yield.
But you won’t get rich on WMT stock. The people who get rich at Walmart are already rich.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
