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Buying Walmart Stock Could Be the Smartest Thing You Ever Do

By Lawrence Rothman, CFA - Feb 25, 2021 at 12:33PM

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Walmart's size and strength make this stock a potential core portfolio holding.

While Walmart's (WMT -0.39%) stock price fell by around 5% last week after reporting its fiscal fourth-quarter results, the company's business is still strong and long-term investors should take notice.

Walmart capped off a very good year, which ended on Jan. 31, with a 7.5% year-over-year revenue increase in Q4 to $152.3 billion after removing the effects of foreign currency translations. Its operating income fell slightly to $5.7 billion from $5.9 billion, but this was due to extenuating circumstances, including $1 billion in costs related to COVID-19. For 2021, management expects a low single-digit percentage increase in adjusted sales, and operating profit to stay flat or increase slightly. No doubt, that forecast disappointed investors.

Irrespective of short-term guidance, this company has managed to be successful through the years. Having Walmart as part of your portfolio is not only smart, it could make you richer, too.

A clock with the words Time To Buy written on it.

Image source: Getty Images.

Walmart knows its customers and is changing with the times

Walmart's low prices get customers into the door. Its "everyday low prices" efforts help draw in more than 265 million customers every week. This is even more true during tough economic times, like now when unemployment is still elevated. In 2020, during the pandemic and resulting recession, Walmart's adjusted sales increased by 7.7% to $564.2 billion.

The general consensus is that things will improve as governments and companies distribute COVID-19 vaccines. But it can ease investors' concerns knowing they own a company that will do well in all economic scenarios.

Good economy or bad, shopping trends change over time and strong companies adjust to take advantage. Walmart management has done a solid job of dealing with a growing amount of online competition. It is investing heavily in technology to improve its omnichannel offerings. This includes faster delivery of its online merchandise and same-day pick-up options for online customers who want it. Last fall, the company launched Walmart+, its subscription service, to compete directly with Amazon (AMZN 1.70%) Prime.

Last year, Walmart's U.S. division saw a 79% year-over-year increase in e-commerce sales. While COVID-19 forced many people to change their shopping patterns and order online, these results suggest the company was prepared with the necessary infrastructure to fill the increased orders.

Ever-higher dividends

Walmart has managed to turn its higher profitability into greater free cash flow (FCF). Last year, its FCF was $25.8 billion, which it used to handily cover the $6.1 billion of dividends and $2.6 billion of share repurchases it made.

Walmart has a history of rewarding shareholders with higher dividends every year. The board of directors recently increased the per-share quarterly payment by a penny to $0.55, marking 48 straight years with a raise. It is close to hitting Dividend King status (50-plus years of annually increasing its dividend). At the new dividend rate, it is yielding 1.6%.

Walmart won't make you rich overnight. But a solid company that is ready for the future and staying true to its low-cost roots is always a smart purchase to help diversify an investment portfolio. Aside from the long-term stock appreciation Walmart has managed to produce, you also get to collect increasingly higher dividend payments.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$121.89 (-0.39%) $0.48
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$109.23 (1.70%) $1.83

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