If a $10 billion company grows sales by $10 billion in a year, that’s spectacular growth. If a $100 billion company grows sales by $10 billion, that’s respectable growth.
If a $510 billion company grows sales by $10 billion in a year, that’s Walmart (NYSE:WMT). That’s growth of under 2%.
It’s not that Walmart had a bad 2019. For the quarter ending in January it had net income of $4.1 billion, $1.45 per fully diluted share, on revenue of $141.7 billion. For the year earnings were $14.9 billion, $5.19 per share fully diluted, on revenue of $524 billion.
The shares rose anyway. The question is, why?
Not a Growth Stock
At its Feb. 19 opening price of $119.50 per share, Walmart’s 53 cent per share dividend yields 1.8%. That’s less than the U.S. 30-year Treasury bond, which yields 2%.
The earnings show Walmart could easily raise that dividend, but no raise was offered in the company’s press release. What are investors seeing, other than safety?
In the release, Walmart brags that e-commerce sales were up 35%, and that growth at its Sam’s Club warehouses is accelerating. Placer.ai expected better, writing about its “growing strength” a day before earnings. Monthly store visits during the quarter were up 3%, Ethan Chernofsky wrote. But sales were up less than 2.1%.
Maybe there were just some bad boys and girls. CFO Brett Biggs simply said the Christmas season “wasn’t as strong as expected.” The guidance called “weak” was for 2021 growth of 2.5%, against expectations of 2.8%. Most companies would break out the champagne if they expected sales to rise $13.3 billion. For Walmart, it’s a downer.
I consider Walmart fully valued, with a market capitalization of $335 billion against revenue of $524 billion, a price-to-sales ratio of 0.6. I might change my view if it raised the dividend. Target (NYSE:TGT) is doing better, a market cap of $59.5 billion on sales of $77.7 billion, a price-to-sales ratio of 0.8. On the other hand, Target’s 66 cent per share dividend yields 2.2%.
That’s the point. Walmart shouldn’t be valued based on its growth. It should be valued based on its dividend. Walmart isn’t a great income stock. The dividend is up just 4 cents per share over the last five years. It’s also not a great investment for growth. The shares are up 40% over that period, against a 60% gain for the S&P 500.
But this is also a trick of numbers. Walmart is growing from a smaller base. Amazon’s net product sales grew by $18.5 billion in 2019, more than all of Walmart’s sales. Walmart’s revenue remains nearly double that of Amazon.
Walmart also boosts its e-commerce estimates by counting grocery pick-ups as e-commerce. The company is still losing money in e-commerce.
So why are we talking about it? Because Walmart wants us to.
The Bottom Line on Walmart Stock
Don’t be fooled by all the talk. Walmart is an income stock, and not a very good one.
It is a safe pick. If Walmart sales catch cold, it’s because the U.S. economy has pneumonia.
But it’s hard to be a growth stock from a base of $520 billion in sales, with 26% of the grocery business. Analysts, and the company, should stop pretending otherwise.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.