by A reddit user
Introduction:
Good morning/evening everyone. The poll closed out (on r/dividends) with Walmart placing 2nd and Honeywell placing last, so these two will get stock reviews, starting today with Wal-Mart.
Walmart | Save Money – Live Better:
Sector: Consumer Defensive
Walmart is America’s largest retailer by sales, selling a variety of general merchandise and grocery items. It operates 11,300 stores in the US, which account for approx 76% of sales in fiscal 2019, with Mexico and Central America ~6%, the UK ~6%, and Canada ~4% beings its largest external markets.
The company operates several e-commerce properties apart from its site, including Flipkart, Jet.com, and shoes.com (it also owns a roughly 10% stake in Chinese online retailer JD.com). As of 2019, e-commerce accounted for only ~5% of fiscal 2019 sales. However the e-sales growth during the pandemic has greatly increased this.
Walmart has been smart with its acquisitions and partnerships. Walmart has partnerships with Instacard, ThredUp, Shopify, and even Google. The Instacart partnership, together accounts for nearly half of all online grocery sales in 2020. The partnership with Thredup allows Walmart to sell cheaper clothes on its online marketplace, and Shopify allows 3rd party sellers to sell their goods on Walmart’s marketplace as well. Lastly, the Google partnership provides customers voice-enabled grocery shopping and likely much more in the future. Walmart’s partnerships and acquisitions are taken to further complete with and provide a market alternative to Amazon.
Strengths:
– Walmart is the largest retailer in the world providing it unequaled power to leverage their vendor’s, suppliers, and manufacturers, keeping prices low with national and private brands.
– Walmart’s cost advantage provides significant barrier to entry and is consistently used to disrupt their competitors.
– The company is aggressively investing in its e-commerce segment and focused on strategic acquisitions to complete with Amazon. (Mentioned in the last paragraph above)
– The partnership with Google is has the potential to be particularly strong due to Walmart lacking strong tech exposure.
– Walmart PLUS memberships, 2 hour delivery, and expansion into drone delivery services.
Risks:
– Walmart employs millions people and is facing intense pressure to raise wages. This will have an effect on their profit margins.
– Amazon. Amazon is much much more than just e-commerce.
– Walmart’s profit margins aren’t as wide as they could be due to keeping prices lower, this does bring them more sales revenue, but they have to be very wary of any competitors lowering their prices further to undermine Walmart’s position and margins.
Amazon’s threat to many of the traditional brick and mortar industries cannot be understated. Amazon’s model is nearly the example of a monopsony, the opposite of a monopoly. They aren’t interested in dominating one sector, but ingraining themselves into literally everything. This is why Amazon’s model is so disruptive.
In addition to this, Amazon is often the company that raises the conversation of wage increases to undermine it’s competitors. The wage increase to 15$ was much more than them “listening to their critics”, it was a move to further pressure any of their competitors whose margins cannot effectively absorb this cost burden. This tactic, along with Walmarts cheap pricing tactics, is what allows Amazon to nab up companies very cheap. (See the whole diapers deal).
Financial History:
For Walmart we will be looking at the 5 year financials rather than the 10 year due to their push more recently to get into the ecommerce markets.
| Year | Revenue | EBITDA | Debt | Debt / Earning |
|---|---|---|---|---|
| 2016 | $478,615 | $33,559 | $49,994 | ~1.5 |
| 2017 | $481,371 | $32,884 | $45,930 | ~1.4 |
| 2018 | $495,761 | $30,966 | $46,470 | ~1.5 |
| 2019 | $514,405 | $32,635 | $58,033 | ~1.8 |
| 2020 | $523,964 | $31,555 | $72,400 | ~2.3 |
The revenue is honestly just insane and shows how large Walmart is, plus it is something like 80-90% of the US population lives within 15 miles of a Walmart or something? Anyways, $478 Billion to $523 Billion, about an average increase of 2.2% YoY. Not bad, they are continuing to grow, but just ahead of currently inflation rates. When we look at EBITDA though, their margins are shrinking/lumpy. This, based on the company movement, and from what they say in their 10K, this decrease is largely attributed to them moving into e-commerce. These numbers may be significantly different next year since their ecommerce has been growing pretty significantly during the pandemic, they are estimated at 97% annual growth there. However note that ecommerce, despite this increase is still a very small piece of the company right now, it is going to take awhile for it to have a more significant impact, but the growth is absolutely there.
The debt is increasing due to acquisitions as well as investment into the ecommerce segment as well. The 2.3x debt/earnings is a bit higher than their historic levels, but again, they are investing right now, and it is still lower than a 3x where it starts to be a bit more concerning.
| Year | Cash Flow from Operations | Capital Expenditures | FCF/E Ratio |
|---|---|---|---|
| 2018 | $28,337 | $10,051 | $16,840 |
| 2019 | $27,753 | $10,344 | $29,444 |
| 2020 | $25,255 | $10,705 | $13,479 |
Cash flow from operations is definitely in line with the decreasing EBITDA so that makes sense. Their CAPEX been consistent the last few years, nothing to really note there since the e-market stuff has already been mentioned. Now for the Free Cash Flow, in 2019 there is a significant jump, this is because in 2019 they took on ~$12 Billion in debt load, this was added to the FCF/E for whatever reason, we can subtract it and say that is was more likely ~$15/16/17 Billion, which is in line with the decline. In 2018 and 2020 they were making debt payments, appears to be about 1.5 Billion for each of those years, hence the lower FCF/E there.
Over the years, in addition to the dividend, they do appear to be using some of their capital to buy back shares, those have decreased from approx 3,200 – 2,850 outstanding over the last 5 years or so. Some would say this is the better way to give back to the shareholders rather than dividends, but others say that it is a way for companies to create synthetic earnings. Take what you will from that. Typically healthy (large) companies will do both dividends and share buybacks, so take what you will from that.
Let’s Take a Look at the Dividend and Price/Value, and Growth:
Walmart (WMT) is a Dividend Aristocrat that has paid and increased its dividend for 46 consecutive years.
NOTE: Current for November 2020 and very likely to change.
| Stock Price | $151.60 |
|---|---|
| P/E Ratio | 21.89 |
| Current Annual Payout / Share | $2.16 |
| Yield | 1.42% (Based on $151.60 Price Nov 2020) |
| 10 Yr Div Growth Rate | 7.2% |
| 3 Yr Div Growth Rate | 2% |
| 1 Yr Div Growth Rate | 1.9% |
| Current EPS Payout Ratio | 34.45% |
Strictly from a Dividend Growth perspective, the payout is a bit low and the dividend growth has sharply decreased as the company continues to focus on e-market expansion. In addition to this, the yield on cost is of lower value right now, had the stock been purchased earlier when it’s price was closer to 100$, it would have been an excellent buy, at the current price and yield though, there are better prospects.
From a value perspective… well Walmart over the years has traded closer to an 8x multiple, it is currently over 20x. Based on this alone it would be considered overvalued based on its financials, however one also needs to consider that higher multiples are typically paid for companies with stronger growth prospects…which leads us to growth.
From a growth perspective, Walmart is a market titan, the growth will be gradual over longer periods of time, but there are many factors that need to be considered from this perspective (as well as the others):
– Will their e-market investments pay off or will they lose market share due to more competitors in the business and pressure from Amazon?
– Will the decline of brick and mortar stores offset the earnings from the e-market?
– How much could they expand their margins by automating warehouses amoung other segments?
– Do their traditional brick and mortar stores provide Walmart a significant distribution advantage over Amazon? (80-90% of Americans within 15 miles of a Walmart mentioned above)
– How will Wamart continue to nurture their relationships with Google and Microsoft and will it continue to make smart and strategic acquisitions?
– How will future government policies and labor unions affect both Amazon and Walmart?
There are so many different unknowns that need to be considered.
Closing Thoughts:
Walmart is an absolute titan of a company that is transitioning to have a significant e-market presence. Compared to Amazon, Walmart is currently the underdog that still needs to be very cognizant of it’s other competitors, like Target. However, their recent partnerships and acquisitions have enabled the company to expand significantly online during the pandemic, and unlike Amazon, they have a wider physicals presence, stores that can act as distribution centers amoung other things.
Ultimately, Amazon is very likely to continue to dominate, however, Walmart does have the potential to start edging their way into the different market segments and start taking pieces of the pie for itself. Amazon is certainly aware of this, hence the reason it pushes timely wage-increases and other policies to undermine its competitors. Government policy is a significant factor to both due to their sheer size and presence.
At the end of it all, you need to ask yourself, do you think Walmart can continue compete, and continue to work its current business model? Or perhaps you’d take more the side of why not both?
I hope everyone found this post interesting, please supplement this with your own research. There are always more risks that need to be considered, read opposing views, read up on Target and Amazon. Don’t just read whatever will validate a preformed opinion.
As always, thanks for reading, and have a good day/night!
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.