Shares of Walmart Inc (NYSE:WMT) are up 20% since the beginning of the year, but I believe WMT is due for a pullback.
Yes, Walmart is a quality company with sustainable dividend growth, but its shares have gone too far, too fast.
Walmart’s stock trades near its highest valuation of the past five years, however, its dividend yield is at a low point. The technical outlook points to shares being overbought.
High Valuation
The following chart shows the price-earnings (P/E) ratio for Walmart is near the highest level on record. The last time WMT’s P/E ratio was this high was at the beginning of 2018, which was followed by a steep correction.
The following chart shows that when P/E ratio is at 22 or above, it has not been a good time to jump in to Walmart stock.
The high P/E comes amid the backdrop of slowing growth for Walmart. The following table shows revenue growth has been slowing for the past year. Walmart does not report earnings until mid-August and it will be interesting to see if the trend of slowing revenue growth continues. Take a look at the following chart, which shows revenues by the millions:
Q1 2018122,690.004.38%
| Quarter | Revenue | Y/Y Change |
| Q2 2018 | 128,028.00 | 3.79% |
| Q3 2018 | 124,894.00 | 1.39% |
| Q4 2018 | 138,793.00 | 1.85% |
| Q1 2019 | 123,925.00 | 1.01% |
Low Dividend Yield
Along the same line as the high valuation is the fact that Walmart’s dividend yield is near its lowest level on record.
The last two times the dividend yield for Walmart has been below 2%, WMT has corrected. The other two times this occurred was at the beginning of 2018 and at the beginning of November 2018.
In both cases, shares of Walmart underwent large-scale pull backs. Considering the history of pullbacks when the yield falls below 2%, this is something to watch.
The Technical Picture
The weekly technical chart below shows shares of Walmart had an RSI above 70 last week and the prior week as well, which points to overbought conditions.
The last time the RSI had oversold conditions like this was in November 2018 and at the beginning of 2018. In addition, the chart also shows the levels on the MACD are near their highest level in the last three years.
Finally, the blue MACD line has started to turn lower, which points to a coming change in the prevailing trend:
Bottom Line
The bottom line for Walmart is that shares have gone too far, too fast and a pullback in WMT stock appears imminent.
The P/E ratio for Walmart is at an elevated level, the dividend yield is at historically low levels and the technical outlook points to shares being overbought. These three items are all aligning the same as they have in the past, and in both those cases, shares of Walmart have pulled back.
When looking at the two previous pullbacks that occurred when shares were yielding less than 2%, I would not be surprised if Walmart’s stock pulled back 10% to 20% from its recent highs.
As of this writing, Brad Kenagy did not hold a position in any of the aforementioned securities.
