My last article was researching Abbott Labs (ABT). In that piece I defined a ruler stock, "as a well-known term that refers to equities where earnings, if plotted on a graph, form an upward sloping straight trend." In this article we shall investigate the merits of Wal-Mart (WMT), which is another ruler stock.
As defined by Yahoo finance profiles, "Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. The company's Walmart U.S. segment offers meat, produce, deli, bakery, dairy, frozen foods, alcoholic and nonalcoholic beverages, and floral and dry grocery; health and beauty aids, baby products, household chemicals,etc. It operates stores in the United States and Puerto Rico, as well as in Argentina, Brazil, Canada, Chile, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, the United Kingdom, China, and India".
My favorite method of equity selection is focused on a compression of valuation during a long price consolidation, in which fundamental factors such as earnings and dividends continue to grow. The end result is excellent valuation. Wal-Mart has been locked in a wide trading range between the lower 40's to the lower 60's beginning in 2000. The table below details the growth in earnings and dividends over the last 10 years.
Fundamental Data | 2000 | 2010 | Percent Increase |
Earnings per Share | $1.21 | $3.66 | 202% |
Annual Dividend | $.24 | $1.46 | 508% |
Earnings and dividends increased at very nice rates during this long consolidation. We can now view any effects of the growth on valuation measures. The present price earnings (PE) ratio is the lowest of the last 30 years. The dividend yield is trending higher into heretofore uncharted territory.
The current price of Wal-Mart shares trade today within cents of the close in 2000. As noted however, earnings and dividends increased 202% and 508%. Is this enough to warrant purchase? Is the yield high enough with the continued growth? Since 2005 the smallest increase in the annual dividend increase was 9% in 2008. The average increase over the last seven years is over 14%. However, the current yield is only 2.7%.
Is it a good buy? I tend to think it is. The low valuation has put a firm bottom underneath the shares that support current price. The bottom of the range is 42, which I do not see being tested without a new bear market. The next higher level of support lies in the 47-49 area. This area is possible but I lean toward thinking that this level will not be tested. My best guess is that the 51-52 level, a previous level of support, is the best buy range.
Conclusion: The long trading range over the last 10 years with the steady increase in earnings have compressed the PE down to historical lows. In addition, the steady rise in dividend payments has taken the yield to new highs. I believe the shares to be of high value, and low risk. It will be up to the individual investor to determine if the dividend yield is high enough to warrant purchase. For many, it does not attain their minimum yield goal. Further increases in the dividend comparable to the recent past would raise the yield to 5.2% in five years. That might be enough to jolt prices to new highs.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WMT over the next 72 hours.
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