For decades, investors thought of Wal-Mart Stores, Inc. (WMT) as a no-brainer addition to a retirement portfolio.
Heck, even a regular “conservative portfolio” would contain the legendary company’s shares. It made some sense, because Walmart stock did spectacularly well over the long-term and paid a dividend to boot.
Times have changed.
I would not go near Walmart stock. There are many reasons why, and here are a few.
People Don’t Shop the Same Way Anymore
One of the big reasons has to do with the changing retail environment.
Whereas WMT used to be the discount house of choice, many competitors have since sprung up.
For starters, we now have a massive base of dollar stores — over 40,000 — against which Walmart must now compete. Many dollar stores moved into selling a larger variety of food items and produce, which steals market share from WMT.
Then there’s Costco (COST). Although the chain isn’t a direct competitor for the low-income consumer, it is for the middle-income consumer who might once have shopped at Walmart, until something better came along.
Most of all, WMT now must compete with Amazon (AMZN). Walmart may have lots of items to choose from in its stores, but it will never have as much as Amazon does. When it comes to consumer staples, I can anecdotally speak to the fact that Amazon is at least competitive in numerous categories.
Walmart’s Charisma Crisis
There’s also what I refer to as the “yuck factor.” The sad truth is that Walmart stores are frequently described as … well, gross. They sometimes aren’t kept particularly clean and the clientele doesn’t much care. That does not translate to thoughts of fresh produce and good food, harming the grocery business, which accounts for more than half of revenues.
Meanwhile, Walmart stock suffers from really bad PR, and from a corporate culture that has no vision, resulting in low employee morale.
The problem when you run a company whose claim to fame is discount pricing and convenient locations is that discount pricing means tight margins — 3.19%.
Now those margins are under attack.
In an effort to reverse both the bad PR and low morale, Walmart decided to raise wages. That was a terrible decision as far as the bottom line is concerned. Not only is the company facing flat-to-declining same-store sales, but now expenses are going through the roof.
When you look at the financials for Walmart stock, you see a company whose top line is inching up about 2% per year, but whose net income is pretty steady at $16 billion. Now, you’d think $16 billion would be great news, and it is. Certainly free cash flow is solid, running between $10 billion and $16 billion annually, and pushing out a 3%-plus yield.
Yet in the broader picture, retirement investors need more than just a stable dividend. They also need a stable — or rising — stock price. A 3% yield is small consolation for Walmart stock owners who have seen a 33% selloff from the stock’s 52-week high.
This is why I can’t stand money managers who routinely push retirement investors into familiar large-cap names. Walmart stock’s best days are gone, folks. If you want to be in dividend-paying stocks, you can’t be in a business that has stalled, which is what has happened with Walmart.
I suggest moving away from these familiar names and into preferred stocks, which pay far more in dividends and generally have very stable stocks prices with very little downside risk.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
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