Monday, July 14, 2014

Dividend Growth Investment Walmart


Just a few days ago, I had another opportunity of deploying fresh capital, and the result as you can recognize by the logo, was Walmart (WMT). I got to say, this was one of the investments that took me the longest to reach a decision.

From a dividend growth investor stand-point, Walmart is definitely extremely interesting. With a market cap in the magnitude of $200B, a dividend of 2.5%, 41 consecutive years of dividend increases and a recent average increases around 15%, there is nothing not to like.

In terms of performance track record and industry, they have a very compelling proposition, and used to have strong growth in what is considered the most defensive industry. Just as a reference, from the highest peak to the lowest drop, Walmart just dropped 22% in the great recession, reaching its lowest in mid-2009. By the end of the year, all of it was recovered.

I have always been very wary of investing in the retail industry because quite frankly, defensive or not, it is extremely brutal. As a retailer you have very low margins, your brand power is not very high, but can damage you hard if you're perceived in a negative light, and on top of that, sales are all about ease of access by customers and the best price. In recent years, Walmart has been facing some hardships, both in terms of brand image and facing headwinds in growing their business. This has reflected itself in the dividend increase this year, resulting in a "disappointing" increase of 2%.


The headwinds they face do not scare me at all. Even this year, they still managed a small increase in the their total revenue and, if it were not for adverse currency movements, revenue would have grown by 2.1%, a very impressive growth for such a huge retailer in a time where consumer spending is low in the U.S. and where China has slowed down. While many were disappointed by this, and considered the bad weather as a "cheap" excuse, keep in mind that all retailers showed worse results than they usually do, which at least demonstrates that the retail sector as a whole was in difficulties this latest quarter.


Having looked at past and present, all that was left was looking at the future prospects and competitive advantage of the company. For me the future of retail is undoubtably rooted in e-commerce: Be available to customers at the distance of a click, allow them to shop comfortably, use the data you gather from their behavior to better help them find products they like, thus promoting happier customers while increasing your sales, and combine that digital offer with a very strong physical presence. This means, having nearby stores that can allow customers to pick their orders from the stores if so they wish, while the stores work as warehouses to allow faster delivery to customers who want their deliveries at home.

In the department of e-commerce, surprisingly to many, Walmart is acting fast and effectively. They created a fairly independent division called Walmart E-commerce with a very "Tech company" vibe. They have offices in Silicon Valley, where a significant portion of the tech talent is based. They have trendy "techy" offices to attract talent, and they are hiring en-mass, including talent from other top tech companies, such as Amazon, Microsoft and Google. This investment is boding well for them, their e-commerce platform has revenues of around $10 billion, growing at around 30% y-o-y, and is the second biggest e-commerce platform in the Western world (if you exclude Apple's site, which isn't really a direct competitor).

What about competition? I was not very keen on buying Target (TGT), but I got to say I saw them as a big threat for WMT, they are big and seem to have a much more positive image in the U.S. This has kept me from investing in this space, on one side, while I fully recognize Target as a good dividend investment, it just doesn't cut it for me, for some reason, it seems like nothing stands out. On the other side, I was not sure if WMT could cope with the competition going forward. However, seeing how well WMT is executing in the e-commerce space and looking at how Target is executing, I see a definite competitive advantage forming to the favor of WMT.

I also appreciate their drive for efficiency and sustainability as they expect to able to reduce costs by $1B by being able to have 100% energy generated from renewable sources.


Stock Price: 76$
Dividend Yield: 2.5%
Dividend Raise Streak: 41 Years
Typical Yearly Dividend Growth (5yr): 12%

What about you, what do you think of the future of retail?

10 comments:

  1. I like the trade, I think that WMT is one of those stocks I will be holding for years to come if not forever.

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    1. Hi Captain Dividend,

      Thanks for stopping by! Nice to see a fellow dividend investor is so confident on WMT's future. I really would like to hold it forever. I'm always confident in my investment choices, but seeing what other investors in this community are buying really gives me great ideas and confidence in my choices.

      Best wishes,
      DividendVenture

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  2. I am debating between TGT and WMT; I got both of them on my watch list. I might initiate a buy soon. Both seem decent for a long term dividend investment. Although TGT seem like they have more bump to overcome.

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    1. Hey J,

      THey are both great picks. As you can see by the post, I favor WalMart significantly, but TGT Compensates for the challenges ahead with a higher dividend. In the end, it depends on what your goals are as an investor.

      Best wishes,
      Dividend Venture

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  3. I can see why WMT and TGT have been very popular among the dividend bloggers for the past few months but I still can't get over the bigger headwinds that many retailers face and will face from Internet competition going forward. It seems that retail spaces are closing left and right as the commercial need for shopping dwindles. One of the reasons I don't like REITs that own commercial property. I'm not saying all commercial will go away, we still need to eat and go out and shop.... I just feel the need for these types of retail facilities will decline. Thanks for sharing.

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    Replies
    1. Hi DivHut,

      I definitely understand where you are coming from. As I said in the post, this was one of the stocks that took me the longest to reach a decision to buy. The headwinds do look scary, in fact, I'm still with you on the commercial REITs. Precisely because of internet competition, I see them having lower demand in the future.

      Thanks for sharing your thoughts,
      Dividend Venture

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  4. While TGT has a nice dividend, I feel WMT is the safer company to own in the long run. WMT's annual retail sales dwarfs its competitors. Also, this is anecdotal but in my local area Wal-Mart seems to be busier than Target.

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    1. Hey deaddividend,

      Thanks for stopping by! I'm completely in tune with you on this one, I see WMT's current execution as superior to TGT in terms of online business. On the physical space, a lot of people hate them, but they have incredible operational execution, great pricing power and they adapt to the market very quickly for a company with such a big size.

      I'm glad to hear your anecdotal claim, as I was researching the stock, I saw many anecdotal claims of WMT's being empty and having terrible service. Thanks for this perspective!

      Best Wishes,
      Dividend Venture

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  5. I only really know about Wal-Mart through their purchase of the UK supermarket: ASDA. The UK grocery retail market is in a bit of turmoil at the moment, the largest retailer, Tesco is suffering badly, partly due to Aldi and Lidl beginning to gain larger market share. ASDA is quite a large company too, so it'll be interesting to see what happens to ASDA (compared to Tesco), and thus Wal-Mart in the long run.

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    1. Hi Theres Value,

      I am quite happy with their presence in the uk under the form of ASDA. They have been performing pretty well here, and this environment has been pretty rough on retailers. I think it's just a matter of time until we start see some consumer spending power increases and we start seeing Wal-mart growing at a decent rate,

      Cheers,
      Dividend Venture

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