Should You Buy the Dow — Wal-Mart

by Lawrence Meyers | October 31, 2011 8:00 am

Today, we’ll look at Dow Jones Industrial Average component Wal-Mart (NYSE:WMT[1]). Unlike some of the more obscure names in the index, there’s no doubt you’ve heard of this company — even if you have been living under a rock since its founding 66 years ago.

Wal-Mart has just about everything a person needs at each of its massive stores, and in many ways is really the forerunner of Amazon (NASDAQ:AMZN[2]). The company gets a lot of flak for putting mom-and-pop stores out of business, but there’s no denying that it is one of America’s greatest success stories — that goes for the stock as well. The stock is literally a 1,000-bagger since it went public in 1972 at a split-adjusted price of 5.69 cents per share.

Wal-Mart is so powerful that it barely batted an eye at the financial crisis. While most other companies stumbled and even fought to stay in business, Wal-Mart’s earnings actually grew an astonishing 20% in FY 2008, and grew another 7.3% in 2009!

Things have only improved. There are no key drivers to Wal-Mart. Wal-Mart just is. In many small cities and rural areas, it might be the only game in town. In large cities, it can be almost as dominant, although Target (NYSE:TGT[3]) now offers real competition.

The company’s financials just hum along. It has $8.1 billion in cash on hand. You might fall out of your chair when you see that Wal-Mart has $48.5 billion in debt, but it pays only about 5.5% interest on it. As you might expect, at this point in its history Wal-Mart is a cash machine. Trailing 12-month cash flow was $10.6 billion. The company also had 2.3 times the amount of free cash flow necessary to pay its 2.6% dividend. It’s a meager dividend, all things considered.

Unlike every other stock in the Dow or, for that matter, in the entire market, the company remains tightly controlled by insiders, who hold 48% of the stock. When you buy Wal-Mart stock, you can be assured that management’s interests are aligned with your own. A rare thing, indeed.


Does all this mean the stock is worth buying? Stock analysts looking out five years on Wal-Mart see annualized earnings growth at 9.4% — still, after all these years. At a stock price of $57 on FY 2011 earnings of $4.49, the stock presently trades at a P/E of 12.7. That’s somewhat pricey given its growth rate, but the premium is deserved given its rich history, insider ownership, free cash flow generation and brand value.

If we put an 13 P/E on it, on projected 2015 earnings of $7.57 per share, we get a price target of right about $98. That’s a 75% upside from today’s prices. That doesn’t leave a margin for error, but Wal-Mart probably doesn’t make many errors, either. That being said, retirement holders might not want to initiate new positions at this price.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. Check out Meyers’ take on other Dow Jones stocks here.

  1. WMT:
  2. AMZN:
  3. TGT:

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