Walmart (NYSE: WMT)
QVI Research Report | Updated Coverage | July 2023
Summary
Love it or hate it, Walmart is an American institution.
QVI added the stock to the Expanded Portfolio in 2017 for its high-quality business model, compelling value proposition, and discounted stock price.
Following a two-bagger run-up since inception, beating the S&P by almost 4,000 bps, Walmart seems to have returned to earth.
Thus, QVI maintains its view on the shares in this updated research report.
When referencing this report, premium (paying) subscribers can access their Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on July 19, 2023, and intended for illustration only. If reading this in your email, consider viewing in the Substack App for a more inclusive experience.
Walmart Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Walmart, Inc. (NYSE: WMT) is a dividend-paying large-cap stock in the consumer staples sector’s merchandise retail industry. WMT was added to the QVI Expanded Portfolio on June 27, 2017, at a dividend- and split-adjusted $68.03 a share.
Walmart, Inc. engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart US, Walmart International, and Sam's Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, and discount stores under Walmart and Walmart Neighborhood Market brands; membership-only warehouse clubs; e-commerce websites, and mobile commerce applications.
The company was formerly known as Wal-Mart Stores, Inc. and changed its name to Walmart Inc. in February 2018. Walmart Inc. was founded in 1945 and is based in Bentonville, Arkansas, USA.
QVI’s value proposition elevator pitch for Walmart:
Love it or hate it, Walmart is an American institution.
Performance vs. Sector and Market
The chart below illustrates WMT’s performance against the Consumer Staples Select Sector SPDR® Fund ETF (NYSE: XLP) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of Walmart in June 2017.
For example, WMT outperformed its sector and the broader market in total returns during the coverage timeframe.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Walmart’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Walmart: Bullish.
WMT Total Returns vs. XLP and SPY
Walmart Inc (WMT) Total Return: 127.20%
Consumer Staples Sel Sec SPDR ETF (XLP) TR: 57.22%
SPDR S&P 500 ETF Trust (SPY) Total Return: 108.80%
Since June 27, 2017 (as of July 19. 2023)WMT Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-year Treasury benchmark note.
Earnings and Free Cash Flow Yields
WMT’s earnings yield traded below the QVI targeted floor at 2.69%, as demonstrated in the chart below. In addition, at 4.64%, WMT’s free cash flow yield was also under the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that WMT trades at a premium. QVI will further explore valuation multiples later in this report.
Dividend Yield
Walmart offers a modest forward dividend yield of 1.46%, supported by an otherwise conservative 34.88% payout ratio, thus indicating a dividend rate with room for additional annual increases.
WMT yielded 3.35% from an annual payout of $2.28 on a split- and dividend-adjusted cost basis of $68.03 per share on June 27, 2017, the date of QVI’s initial stock coverage. Thus, our yield-on-cost basis was +189 basis points [bps] above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.75% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for WMT was 2.93% or -82 bps below the 10-Year and 3.56% or -19 bps below the Treasury yield when using QVI’s June 2017 yield-on-cost basis.
QVI’s shareholder yields rating for WMT: Neutral.
WMT Shareholder Yields
Walmart Inc (WMT) Price: $154.59
Walmart Inc (WMT) Earnings Yield: 2.69%
Walmart Inc (WMT) Free Cash Flow Yield: 4.64%
Walmart Inc (WMT) Dividend Yield: 1.46%
One-Year Trailing (as of July 19, 2023)Walmart Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Walmart had three-year annualized mid-single-digit revenue growth of 5.27%, underperforming the 9.12% median growth of the consumer staples sector.
Farther down the income statement, Walmart had a trailing three-year low-single-digit net profit margin of 2.22%, in line with the sector’s median net margin of 3.16%.
Returns on Equity and Invested Capital
Walmart’s management produced a trailing three-year return on equity or ROE of 16.07%, surpassing the targeted threshold and the sector’s median ROE of 10.17%.
Stock buyback programs often elevate ROE. For example, in November last year, Walmart’s board of directors announced a new $20 billion share repurchase program. Since then, the company has reported $1.9 billion in buybacks as of the April 30, 2023, quarter-end. However, are its senior executives purchasing the shares at value prices?
At 9.72%, Walmart’s three-year return on invested capital, or ROIC, was below the QVI threshold but bested the sector’s median ROIC of 6.29%, indicating that its senior executives are above-average capital allocators.
In addition, Walmart’s ROIC covered its weighted average cost of capital, or WACC, of 7.39%. (Source of WACC: GuruFocus).
With modest revenue growth, sector-competitive net profit margin, and above-average returns on equity and capital, Walmart’s management continues its consistent, if merely adequate, performance in Bentonville.
QVI’s fundamentals rating for Walmart: Neutral.
WMT Returns on Management
Walmart Inc (WMT) Revenue (3y Growth): 5.27%
Walmart Inc (WMT) Profit Margin (3y Median): 2.22%
Walmart Inc (WMT) ROE (3y Median): 16.07%
Walmart Inc (WMT) ROIC (3y Median): 9.72%
Three-Year Trailing (as of July 19, 2023)WMT Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Walmart, Inc. (WMT), including potential catalysts. So, let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have no beneficial position through direct ownership of any stock mentioned thus far in this report. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
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