The recent bear market has caused concern among some growth investors. With rising interest rates and inflation at a 40-year high, many investors fear a return to the 1970s, a decade when the Dow Jones Industrial Average remained essentially flat.
However, growth investors may have cause for optimism thanks to Walmart (WMT -1.05%) or at least its history. Its rise from a regional store chain to the world's largest retailer offers three key lessons that could teach and encourage investors hoping to make gains as the overall market struggles.
Lesson #1: Growth stocks can still prosper in a flat market
Walmart launched its IPO in October 1970 at $16.50 per share. As of today, the stock has split 11 times. That means the original 100 shares are now 204,800 shares, taking that split-adjusted IPO price to $0.008 per share.
Despite that increase, the growth in the 1970s is noteworthy. At the time of its 1970 IPO, Walmart operated 38 stores in Arkansas and four nearby states. That year, it reported annual sales of $44.2 million. By 1979, its footprint expanded into additional states, taking its store count to 276 and its yearly sales to just over $1.2 billion. Also, the next year, it initiated its fourth 2-for-1 stock split.
By that time, the stock price had risen 48-fold from its 1970 IPO. In comparison, the Dow increased by 29% over the same period.
Walmart is unlikely to replicate that growth rate today. But like in the 1970s, struggles in the stock market will likely not stop the growth stories of today from logging significant returns. Hence, investors should continue to invest in growth stocks, particularly profitable ones that hold the potential to lead their industry.
Lesson #2: Do not count out the power of long-term dividend growth
The power of dividends is an underappreciated part of stock investing, and Walmart's payout growth deserves credit. Walmart declared its first dividend in March 1974 and has increased it at least once every year since that time, making it a Dividend Aristocrat.
Today, the quarterly dividend stands at $0.56 per share, or $2.24 per share annually. This means that investors who bought at the original split-adjusted price of $0.008 per share earn a 70-fold return on their investment every quarter. In other words, investors who bought 100 shares for $1,650 in 1970 now earn $114,688 in quarterly payouts!
Admittedly, Walmart investors from the 1970s could not have predicted that pattern of dividend growth or the Aristocrat status. Nonetheless, it shows the power of dividend investing and should prompt investors to look for newer dividend stocks. If that pattern continues, investors with a long time horizon could also earn outsized cash returns.
Lesson #3: Putting "value" into perspective
Another tenet of Walmart has revolved around low prices. However, investors should also understand how its focus on cost has changed over the decades.
Early in its history, Walmart built a competitive advantage in two key areas. It began by targeting mostly smaller towns. At that time, department-store retailing was not widely available in these areas. Thus, Walmart attracted business by offering a larger product selection and lower prices.
Walmart lowered costs further by applying IT-driven efficiencies to its supply chain and cash registers. Since Walmart could better track stock-keeping and sales, it could offer lower prices without sacrificing profitability.
However, after the death of founder Sam Walton in 1992, Walmart gradually turned to a strategy of reportedly lower salaries and pressure on suppliers to lower costs. Over time, this strategy made it more difficult to maintain a reputation for quality, and such sentiments may have affected the stock price. Over the last 10 years, Walmart has significantly underperformed the Dow.
Walmart's evolving relationship with price and value should teach investors to keep both attributes in perspective. While cutting costs through innovation can bring outsized returns, cutting costs through scarcity will probably have the opposite effect. Hence, instead of emphasizing price, investors should look at competitive advantages that peers might struggle to match.
What investors should learn
Admittedly, most growth investors probably wouldn't buy Walmart today, but its ascendancy can still offer meaningful lessons for stockholders.
Walmart's history shows that growth investors can still have hope for gains in the current market. Moreover, investors should be aware of the massive growth potential involved with continual dividend hikes. Finally, they should understand competitive advantages and how they hold up over time.
Ultimately, incorporating these lessons can give investors hope for the future regardless of how indexes may perform.