- Walmart (WMT) recently reported it made more than $11.5 billion in free cash flow (FCF) during 2021, its highest ever
- This could push WMT stock significantly higher, as analysts estimate sales will rise 3.2% this year to almost $600 billion
- Combined with its plans to buy back $10 billion of its shares, Walmart’s FCF could push the stock up 20%
Walmart’s (NYSE:WMT) fiscal year ends on Jan. 31. It recently reported its full-year earnings, showing more than $11.1 billion in free cash flow (FCF). Based on analysts’ estimates, powerful FCF could push WMT stock significantly higher this year.
FCF is the actual cash earnings of the company after all expenditures and cash flow movements. It cuts through all the accounting issues relating to non-cash charges, like stock-based compensation, depreciation and amortization. It also includes spending on capital expenditures and even working capital movements.
In other words, it shows how much cash the company is piling up each year. Last year, the $11.1 billion in FCF represented about 1.94% of its $572.7 billion in sales.
Forecasts and What the Stock is Worth
For the year ending Jan. 31, analysts surveyed by Refinitiv (reported by Yahoo! Finance) expect revenue this year to rise 3.2% to $591 billion. So FCF could reach $11.5 billion, using the 1.94% FCF margin from last year.
That could mean WMT stock is likely to rise. For one, Walmart has said it will use FCF to buy back at least $10 billion of its shares. That helps its earnings per share, increases the dividend per share and pushes up its stock.
For example, if we project out that WMT stock could be valued on a 2.5% FCF yield (the same as 40 times FCF), its target market cap would be $460 billion. That is the result of multiplying $11.5 billion in FCF by 40.
This is 6% higher than its April 7 $430.8 billion market cap. Based on yesterday’s price of $156.54, that puts WMT stock at a target price of $167.29 per share.
But if the market values Walmart at 45 times FCF (i.e., a 2.22% FCF yield), its market cap will be $517.5 billion. That is 20.1% higher than its market cap today, putting its price target at $188 based on its April 7 price.
The bottom line is that Walmart is powering ahead with huge profits, massive free cash flow and likely a much higher stock price.
Where This Leaves Investors in WMT Stock
This provides an opportunity for value investors. For example, so far this year, WMT stock is up just 8.2% from $144.69 per share. If the stock were to rise another 20%, investors could make more than 28% by the end of the year. In addition, new investors still have an opportunity to make a good return.
It also helps that the company says it will buy back at least $10 billion of its shares. That represents 2.3% of its $430.8 billion market cap at today’s price.
This is a form of shareholder return and reduces the number of shares outstanding. That allows the company to increase its dividends on a per-share basis with the same amount of money. It also helps push up the stock price and acts as a catalyst for the stock to reach its true value.
Given that WMT stock presently pays an annual dividend of $2.24 per share, its present dividend yield is 1.43%. Therefore, combined with its buyback yield of 2.3%, the total yield for WMT stock is 3.73%.
In other words, investors can expect to make at least 3.73% with the stock going forward. But based on price movements, the total return could be much higher.
As a result, investors may want to take advantage of any weakness in WMT stock when it dips. That might be a good time to buy more shares, as it allows the investor to lower their average cost in the stock. In addition, by consistently buying WMT shares at regular intervals, the investor can gain a disciplined approach to averaging into their investment.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.