Wal-Mart Stores, Inc. (NYSE:WMT) is back. Well, kind of. WMT stock rose 13% in 2016, which is certainly a respectable performance. However, for investors who saw Walmart stock hit $90 two years ago, today’s $68 share price still isn’t that reassuring.
The company got hit following a stagnation in revenues and profits. Online efforts are gaining traction, but not at the rate some boosters had hoped. And even income investors have started to bail on the company following unusually small dividend increases recently.
Can WMT stock keep regaining lost ground in 2017, or is the stock’s story broken?
WMT Stock Cons
Weak Holiday Season: U.S. retailers appear to be having a poor holiday season. U.S. retail sales only rose 0.1% in November, versus 0.3% expectations. And it was the slowest month of gains recently. More specifically, Black Friday sales were anemic, down markedly from 2015. Some of that is due to dispersion away from the Thanksgiving weekend specifically. However, it’s still not a good trend.
Big traditional retailer stocks have been getting hammered over the past week or two. WMT stock largely missed the sector selling until Thursday, when it too capitulated to the general malaise. However, with many sector players down 8%-15% recently, there’s room for more downside in Walmart in the short run if the holiday season turns out to have been a total bust.
New Import Tax? Rumor has it that Trump’s team is now discussing a tax on all imports. This tax would be 5% or 10%, depending on which source you read. Regardless, it’d be a blow for companies like Walmart that have very global supply chains. During the campaign, Trump talked about hitting specific offending countries, such as China and Mexico, with tariffs.
However this new import duty would affect all incoming products, making life much more difficult for retailer such as Walmart that have developed broad supply chains across developing Asia, Latin America, and so on.
We’re not just talking cheap Chinese stuff anymore — WMT’s clothes from countries such as Bangladesh and high-end electronics from Japan and South Korea would also face these duties. I don’t expect a tariff against the whole world to get much traction, but it’s a headline risk for the time being.
Little Growth: In 2008, WMT stock topped $400 billion in sales for the first time. We’re coming up on a decade later, and Walmart hasn’t hit $500 billion yet. Once you account for inflation, sales have been basically flat over that stretch. While there’s reason to think the company’s online efforts are picking up steam (see below), the last decade has not been one of Walmart’s finest.
The company got weighed down by all sorts of bribery and corruption scandals with various international divisions. Until recently, management seemed more interested in its share buyback than investing in its stores or technology. Even with that impressive buyback, EPS has only grown by 14 cents (4.47 to 4.61) since 2011. There is good reason WMT stock has its critics.
WMT Stock Pros
Jet.com Taking Off: WMT’s purchase of Jet.com earlier this year raised eyebrows. Many people consider Walmart to be an out-of-touch old-fashioned retailer that will slowly fade into history as millennials grow up. That view is probably wrong. Even prior to buying Jet, Walmart was the U.S.’ No. 2 online retailer.
And now Jet is turning into a significant player in its own way. Its Thanksgiving weekend sales quadrupled this year. Jet already came with arguably the No. 2 most respected American online commerce executive, after Amazon.com, Inc. (NASDAQ:AMZN) CEO Jeff Bezos. And now it has tapped into WMT stock’s unparalleled logistic network, allowing it to experience fewer restocking/shipping issues while achieving lower pricing on its inventory.
Much of Jet’s early success appears to be due to aggressive price competition with Amazon. That’s not a sustainable business model in the long run. However, Walmart, unlike most cyber peers, has the pockets and access to free cash flow to compete hard with Amazon for a long time period. Jet has a corporate parent that can bring the fight to Amazon.
Whether they succeed remains to be seen. But it’s better than the retailers slowing fading away in any case. Speaking of…
Better Than Target: It’s common to dismiss Walmart as a dinosaur of a past era. That’s fine, though I’d argue it’s wrong. But if you want to go after Walmart, sell Target Corporation (NYSE:TGT) first. It is far more exposed to the Amazon threat.
Walmart does half a trillion dollars annually in sales. Target pulls in less than 20% of that. WMT operates in dozens of countries. Target is back to one country, after the not-particularly-adventurous Canadian market was too hard for them to crack, leading to outright disaster. Walmart is the #2 online retailer in the U.S. Target isn’t even in the top 10.
Additionally, Target is notorious for its incompetence at cybersecurity. If the bears are right on WMT stock, Target gets wiped out first. Target’s fractionally higher dividend yield is little reason to trade down from Walmart’s far more diverse and cyber-ready business.
Trustworthy Yield: And mentioning yield, Walmart still has a strong one. Yes, there have been some complaints from the dividend-growth investing crowd lately. WMT stock has only seen small dividend increases the past couple years.
However, the company pays a 2.9% dividend and has a very healthy dividend payout ratio. It has been using a large portion of its free cash flow to buy back shares in the $60’s over the past year. That’s not such a bad thing, given that WMT stock traded above $90 fairly recently.
At 15x earnings, WMT stock is one of the cheaper large-caps in the U.S. at the moment, and its yield and sizable share buyback are shareholder-friendly.
Verdict
WMT stock isn’t a home run pick from current prices. The company has well-known growth issues. The Jet purchase appears to be a strong step in the right direction, but will probably take a couple more years to start really showing big results for the overall Wal-Mart engine. However, WMT stock is cheap and management treats shareholders well.
This isn’t a bad income pick with the potential for nice appreciation once sentiment improves.
At the time of this writing, Ian Bezek owned WMT stock. You can reach him on Twitter at @irbezek.
