Today's Buy Opportunity: Wal-Mart

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Are you worried about deflation? Inflation? One way or the other, signs suggest that things will get plenty tough. To best position your portfolio, you need a company that can gain a competitive advantage even in the worst economic environment. That company is Wal-Mart (NYSE: WMT  ) .

Wal-Mart fast facts

Market cap

$185.7 billion

Dividend yield

2.4%

Trailing P/E

13.1

Revenue

$416.7 billion

Net income

$14.8 billion

Source: Capital IQ, a division of Standard & Poor's.

Now, I'm sure you're thinking: a retailer? In this difficult economic environment? Absolutely.

Wal-Mart is especially well-suited for a deflationary environment. It sells the essential products that everyone needs, and racks up an astounding $47 million in sales every hour of every day, making it the world's largest retailer. More importantly, it's committed itself to be the low-cost leader, bar none. Its supply chain wrings costs out of the system like a python squeezing an alligator. And when economic conditions worsen, Wal-Mart gains an advantage over less capable (but still formidable) rivals such as Target (NYSE: TGT  ) , Costco (Nasdaq: COST  ) , and Dollar General (NYSE: DG  ) .

Wal-Mart's prudent cash management has certainly positioned the company better financially than Dollar General, which suffers under a massive debt load acquired when it was swallowed by a private equity firm. In contrast, Wal-Mart can easily cover its interest payments -- 12 times over, in fact. And Wal-Mart absolutely dwarfs Target and Costco in revenue, selling nearly three times as much as they do combined.

Wal-Mart has buying power in spades (and other stuff, too). With $417 billion in annual sales, the Bentonville behemoth can wrest concessions from the most powerful suppliers. Even the mighty Procter & Gamble (NYSE: PG  ) has to cave in on pricing when Wal-Mart comes to call.

Room for growth
Wal-Mart's sales growth has recently slowed, but it does have several options for continued growth. First, it's expanding into American urban markets with smaller-format stores. Wal-Mart has traditionally focused on being the retail center in smaller cities, where cheaper and more abundant real estate can allow it to provide the one-stop shop for all consumer needs.

Second, Wal-Mart is expanding its tentacles into even more consumer areas. It's been pursuing banking operations at international locations, and it's entered into personal finance in the U.S. with its own credit card and money centers in more than 1,000 locations.

Third, Wal-Mart has robust international operations. It recently moved into India, and it has a solid presence in China as well. In its most recent quarter, the retailer reported 11% sales growth from its foreign divisions, which comprise just 25% of its total sales. Clearly, the company has plenty of room to expand its global component. Brazil, Mexico, and China were notable performers this quarter.

Time to get paid
Like McDonald's (NYSE: MCD  ) , Wal-Mart thrives in tough climates. And also like Mickey D's, its strong operations have allowed Wal-Mart to pay and quickly increase its dividend. This attractive payout makes it particularly suited for tough times. Wal-Mart's stock currently yields 2.4%, and the company has piled on increases at the remarkable rate of 16% per year over the past five years.

The cash-cow nature of its business means that Wal-Mart can continue pumping out those checks. And it's certainly one of the reasons that superinvestor Warren Buffett's Berkshire Hathaway (NYSE: BRK-B  ) bought shares in the company last year. Buffett is a closet dividend investor. And the massive cash returns to investors are also why I called McDonald's a dividend play for a lifetime. Even if these companies' expansions slow down, less money goes into their capital expenditures, meaning more can go into our pockets.

If you like the prospect of continued growth, and the safe payouts offered by a blue-chip retailer, Wal-Mart looks like a retailer for all seasons.

Previous recommendations:

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Jim Royal, Ph.D., owns shares in Berkshire and P&G. Berkshire Hathaway, Costco, and Wal-Mart are Motley Fool Inside Value recommendations. Berkshire and Costco are Stock Advisor picks. Procter & Gamble is an Income Investor pick. The Fool owns shares of and has Write Covered Calls on Procter & Gamble. The Fool owns shares of Berkshire and Costco. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (36)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2010, at 5:06 PM, plange01 wrote:

    todays stock is the same as every days ...CASH.

  • Report this Comment On August 20, 2010, at 6:07 PM, madmilker wrote:

    duh! the last 5 quarter same store sales down in the USA....Adsa's same store sales down for the first time in four years....sold bonds in March and July like they normally do but this past week said they may sell some Yuan Bonds before years end.....and look at that debt.

    remember...kite flying money from all the stores each day of the week to pay for vendors 90 days out only works with growth....once the growth slows it's like a cat inside a silo looking for a corner to crap in...

    and lets not forget about everyone in the 50 states reading this on their China web page...

    "Walmart entered the Chinese market and opened its first Supercenter and Sam’s Club in Shenzhen in 1996. Currently, Walmart operates a number of store formats in China including Supercenters, Sam’s Clubs, and Neighborhood Markets. As of June 27, 2010, Walmart had 187 units in 99 cities, and created over 50,000 job opportunities across China.

    Walmart China firmly believes in local sourcing. We have established partnerships with nearly 20,000 suppliers in China. Over 95% of the merchandise in our stores in China is sourced locally. Meanwhile, Walmart is committed to local talent development and diversity, especially the cultivation and full utilization of female staff and executives. 99.9% of Walmart China associates are Chinese nationals. All our stores in China are managed by Chinese local talent. 43% of leaders at senior manager level and above are female. In 2009, the company established the “Walmart China Women’s Leadership Development Commission” for driving women’s career development."

    That don't support American exports and American jobs....

    and with what "plange01" typing CASH is king...think about the price per share back on January 01, 2000.. it was $69.12 and with inflation from 2000 until now... one would have to be looking at $87 just to be at even money.

    Retail makes NOTHING...

    Governments only make MORE DEBT...

    It's time for less of those two and for America to get back to what it does best....MAKE STUFF..

    cause George Washington on that dollar can't help anyone in the United States of America if he is being held in a foreign hand.

    Made In America is the only way out of this mess cause foreign made put US here.

  • Report this Comment On August 20, 2010, at 8:29 PM, xetn wrote:

    So, madmilker, when are you going to start making something "made in America"? Some of the reasons so many manufacturing jobs (and many companies as well) have left the US is because of:

    1. high cost of regulation (over $6000. for every man, woman and child in the US)

    2. high labor costs (several times higher than China, India, etc.)

    3. high benefit costs (practically non-existent in China).

    4. high taxes

    5. government generated uncertainty. (Will there be more ObamaCare, Cap N Trade, taxes another war or two?)

    Companies spend millions of dollars just to set up a production line. With all the items above, who wants to take the risk when it is safer and cheaper to just off-shore? Government Motors?

  • Report this Comment On August 21, 2010, at 1:15 AM, TMFMMTInvestor wrote:

    I love how Erin Corr says something to the effect, "See us tomorrow for another 11 O'Clock Stock." Tomorrow's Saturday!

    ;-)

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