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All Contents © 2019The Kiplinger Washington Editors
By Aaron Levitt
| December 21, 2016
Mike Mozart via Flickr
Dividend investing is supposed to be a tad bit boring. After all, the real idea is find those companies with wide moats that offer steadily rising revenues and profits. Ultimately, those steady profits result in higher dividend payouts year in and year out. And when it comes to dividend stocks, retail kingpin Walmart Stores, Inc. (WMT) has already proven itself to be worthy of income investor’s portfolios. But WMT’s past history isn’t the only reason why dividend investors should be seriously considering Walmart stock.
Recent moves will continue to keep the profits and revenues flowing at the retailing giant. Not to mention, fight off rivals in faster growing market segments.
In the end, WMT has the goods to keep its payout going and growing into the future.
Random Retail via Flickr
If you took Target Corporation’s (TGT), Costco Wholesale Corporation’s (COST) and Amazon.com, Inc.’s (AMZN) total revenues and added them up, you still wouldn’t come close to the number of sales Walmart had last fiscal year. For Wally World and its 11,500-plus stores worldwide, that total came in at a staggering $482 billion worth of sales. That’s right — nearly a half a trillion dollars. WMT is simply the world’s largest retailer.
But it’s not just sheer volume of sales that makes Walmart stock a great dividend play. It’s how it generates those sales that is the impressive thing. The key comes down to WMT’s product mix.
Sam Walton’s concept of the supercenter — being a one-stop shop for consumers — is continuing to pay-off big time. WMT offers a wide range of items. That includes consumer staples like toilet paper and dish soap to consumer discretionary purchases like televisions and toys. The duality of that product mix allows Walmart stock to benefit in both good times and during bad.
Consumer staples tend to lead in any environment. After all, you still need to wash your hair or do the dishes even if the economy is taking a beating. And when things are great, consumers head on over to the other side of the aisle and snag-up a karaoke machine or two. The steadiness of the staples combined with the extra boosts form the discretionary items have continued to help WMT push up its revenues over its history. While cost cutting and focus on margins have helped boost Walmart’s profits.
Overall, they’ve helped Walmart stock become a great income play. (The current dividend yield is 2.8%.) WMT declared its first dividend back in 1974 and it has managed to increase its annual cash dividend every single year since then. That 42 years of unbroken increases has been driven by the constant growth and steady sales portfolio
Mike Mozart via Wikipedia
And if history is any sort of guide, then WMT’s future as a dividend champion is almost assured. That’s because the world’s largest retailer is taking the steps to combat a growing threat and remove problems with its stores.
The obvious threat is the continued growth in e-commerce. It’s no secret that Amazon and other online retailers are starting to eat brick-n-mortar’s lunch when it comes to sales. Even Walmart has felt the heat in recent years. Last year, WMT’s annual sales shrank for the first time since it went public.
But the world’s largest retailer isn’t taking that lying down. Walmart has undergone a massive e-commerce transformation.
That transformation started with a selection of apps, in-store logistics upgrades and a massive $3 billion purchase of Jet.com. Jet, which is the brain-child of online pioneer Marc Lore, uses various algorithms that reduces prices based on shipping location and quantity. The buyout was designed to complement Walmart’s own mantra of low prices. And it seems to be working.
During WMT’s most recent earnings report, online sales jumped a solid 20.6%. And in only its second holiday season as a company, Jet.com has experienced torrid growth under Walmart. Over the critical Black Friday weekend, Jet sales and traffic rose over 300% and the average order was 19% higher in terms of dollar amount. That’s just the right amount of growth to power Walmart stock ahead.
And while e-commerce is clearly the future, WMT isn’t relaxing on its steady stream of store revenues either. Walmart has announced that it plans on investing around $2.7 billion into its employees. This includes higher wages, better training and customer service focuses. That’s a page directly right out of Costco’s playbook.
The idea is to drive the in-store experience and make Walmart the only place consumer’s shop — online or in person. Like its e-commerce efforts, this store focus is also working with both traffic and sales up in the recent quarter.
In the end, WMT has taken the steps needed to continue growing on both fronts. Slow, but steady growth from its massive footprint of retail space will continue to provide plenty of cash flows over multiple economic cycles. Meanwhile, its effort on the digital front will provide plenty of extra boosts and help platform the very distant future.
And given that initiatives are actually working, as evident by rising sales and visitor traffic, Walmart has the goods to keep powering its dividend further. Even more so when you consider that WMT stock features a low payout ratio of just 50%. That gives it plenty of time to make sure its commence and store plans really start working. For investors, that means Walmart’s status as a Dividend Aristocrat is pretty safe.
WMT stock is a good as it gets for dividends. Built on the back of its massive store footprint and recession resistant nature, Walmart has proven itself as a dividend champion throughout its history. More recently, its moves to boost e-commerce and store traffic will ensure that history keeps going far into the future.
This article is from Aaron Levitt of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.
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