Wal-Mart Stores Inc (ticker: WMT) is a corporate American empire. The single largest retailer in the world humbly began in Bentonville, Arkansas, as the brainchild of Sam Walton, and logged $485 billion in revenue in fiscal 2017.
But what about Walmart stock? Is WMT worth buying at today’s price? After all, sheer size alone isn’t much of a rationale for buying a company’s shares.
[See: Buy and Hold: Be an Investing Expert Like Warren Buffett.]
As with any investment, there are pros and cons to investing in Walmart stock. Here are the main ones to ruminate on if you’re considering becoming — or already are — a WMT shareholder.
Arguments For Buying Walmart Stock
Beefing up e-commerce sales. In the first quarter of fiscal 2018, Walmart reported an astounding figure: 63 percent. That was the revenue growth rate for Walmart’s e-commerce segment. The quarter before, WMT grew e-commerce sales by just 29 percent year-over-year, highlighting just how impressive the most recent number was.
This growth is partially the result of e-commerce acquisitions like last year’s $3.3 billion purchase of Jet.com, but what’s even more impressive is that the majority of that 63 percent figure came organically.
In mid-June 2017, Walmart agreed to purchase another web-based retailer, Bonobos, for $310 million in an effort to further bolster its online footprint, so progress is being made.
Great capital return program. One of the greatest aspects of WMT stock is its capital return program, which is a fancy way of saying the company gives a whole lot of money back to shareholders by buying back Walmart shares and paying quarterly dividends.
“The WMT dividend yield of 2.7 percent exceeds the current 10-year T-bond yield of 2.2 percent,” says Bob Johnson,, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. “Dividends have grown 127 percent over the last nine years and the dividend still appears safe, as WMT has increased dividends for 42 consecutive years.”
But that’s not all WMT stock has going for it.
Solid fundamentals, valuation and cash flow. Walmart stock also boasts an attractive valuation and an underlying business that continues to improve over time. Walmart stock sells below market value, with a price-earnings ratio of 17. That compares favorably to the Standard & Poor’s 500 index, which has a P/E of 24.
“Free cash flow per share has risen substantially in recent years,” Johnson says. Free cash flow more than doubled between 2014 and 2017, from $10.14 billion to $20.91 billion, all as the share count was falling.
These are typically great things to see in stocks, and some of the best investors in the world, like Berkshire Hathaway ( BRK.A, BRK.B) CEO Warren Buffett, go bonkers for characteristics like this.
Arguments Against Buying Walmart Stock
Efforts in e-commerce haven’t been successful enough. Despite its efforts as outlined above, Walmart is doing too little, too late to rebuff Amazon.com‘s ( AMZN) e-commerce dominance.
David A. Steinberg, founder and CEO of Zeta Global, cites the $310 million Bonobos purchase as a prime example of Walmart’s lack of urgency. “Walmart did a very small deal around a company that was already virtual,” he says.
The same day Walmart bought Bonobos, Amazon announced its $13.7 billion acquisition of Whole Foods Market ( WFM), taking the Amazon-Walmart rivalry to a new level.
“Amazon is making bold moves with massive purchases in a category that takes them into a true clicks and brick strategy,” Steinberg says.
[Read: What Industry Will Amazon Enter Next?]
Its capital should be spent differently. In the first quarter of the 2018 fiscal year, Walmart returned more than $3.7 billion to shareholders, $1.5 billion of which was dividends and a whopping $2.2 billion of which was share buybacks.
What if Walmart invested that $2.2 billion per quarter in improving its e-commerce platform and generally making Amazon’s life more difficult? Better yet, what if it had been doing that for years?
If Walmart hadn’t spent $20 billion over the last two years on financial engineering (a.k.a. share buybacks), perhaps it would have more than $6.5 billion in cash on its balance sheet, enabling it to really use an elephant gun and snap up some meaningful e-commerce assets.
“For Walmart to truly show they want to build up a bricks-and-clicks strategy to compete with Amazon, they’re going to have to make a much bolder move,” Steinberg says.
Not everyone agrees. Stefan Weitz is the executive vice president of technology at Radial, a company that helps brands and retailers deliver great customer experiences.
“You could make the argument that Walmart didn’t have the focus it probably should’ve had in e-commerce,” he says. “But you’ve got to watch how quickly you dump money into something that transformational that quickly.”
Warren Buffett is selling — aggressively. Need one say any more? When Walmart boasted solid fundamentals, strong and growing cash flow, and a steady business, Buffett was a longtime bull on WMT stock. But he’s not so sanguine on the company anymore, having pared his Walmart position from $3 billion to less than $100 million in less than a year.
Perhaps he sees how tough of a competitor Amazon is, perhaps he doesn’t like how Walmart slowly and reluctantly realized how urgently it needed to expand its online operations, or maybe it’s something else. But if history has taught us anything, it’s that betting against Buffett is a fool’s errand.
In Conclusion
Walmart is going head-to-head with one of history’s biggest corporate dragonslayers: Amazon.com and its iconic, ruthless founder and CEO, Jeff Bezos.
While WMT should certainly be applauded for its recent strides in online retail, those plaudits are about as meaningful as congratulating the hare for his blistering beginning to the race.
The fact that Walmart shares yield slightly more than 10-year T-bonds currently underscores, however, that WMT stock is far from being entirely worthless. If you’re looking for steady, reliable stocks that pay a decent dividend, Walmart is definitely worth a look.
[See: 10 Ways You Can Invest Like Warren Buffett.]
But if you want more from your portfolio, the unrelenting trend to e-commerce is not WMT’s friend; in 2016, 53 percent of all U.S. e-commerce sales growth came from Amazon alone, leaving Walmart and every other retailer to fight for the scraps. Until that changes, the company that once turned the entire retail industry on its head will have to be content playing second fiddle.
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Should I Buy Wal-Mart Stores Inc (WMT) Stock? originally appeared on usnews.com
