Sometimes the best stock investments are hiding in plain sight. Take Walmart (WMT -0.08%), for example. It's the world's biggest retailer and one of the most widely followed businesses on the market. Yet its latest earnings report surprised many investors by showing strong sales and earnings momentum through the fiscal Q2 period.
Walmart gave shareholders a lot to celebrate in that report, including the potential for faster dividend growth from here. Let's look at some big reasons this well-known stock could be the next great addition to your portfolio.
1. Good sales trends
Walmart is having no trouble attracting shoppers in this period of high inflation and slowing consumer spending. Comparable-store sales in the core U.S. market rose 6.4%, beating expectations and convincing management to raise their full-year outlook. Walmart now sees sales rising by between 4% and 4.5% this year, up from the prior target of 3% growth .
The strength was broad based this quarter, with growth coming from both the e-commerce segment and from within stores. Customer traffic was up a healthy 3%, while average spending rose 3.4%. These balanced wins reflect Walmart's excellent market share position, particularly in the consumer-staples niche. "Our customers and members are prioritizing value and convenience," CEO Doug McMillon said in a press release.
2. Financial wins
Three other financial metrics demonstrate Walmart's unusually strong business. Profitability, for one, expanded this past quarter as operating income grew at a 7% rate. That boost led to another outlook upgrade, and Walmart now sees operating income rising by between 7% and 7.5% this year, up from the prior range of 4% to 4.5%.
Cash flow is excellent as well, with free cash flow jumping to $9 billion from $1.8 billion a year ago. Success on this score makes it likely that the company will continue its streak of steadily raising its dividend payment.
Finally, Walmart's inventory levels fell 8%, meaning the retailer isn't under pressure to cut prices. Instead, it's in a great position to maintain or boost profit margins over the next few quarters.
3. Price and value
As you might expect, Walmart's stock is priced to reflect many of these valuable competitive assets. Investors must pay 0.7 times annual sales for shares today, compared with a price-to-sales ratio of 0.5 for Target and 0.25 for supermarket chain Kroger. Only Costco has a higher valuation at 1 times sales, but this premium reflects the warehouse giant's steadier earnings profile because of its membership subscription business.
You get a lot of value for the price of Walmart's stock today, though. Faster sales and earnings growth in 2024 are just a few benefits, but the list also includes dividend income, excellent cash flow, and a dominant market share in a massive global industry.
Sure, Walmart isn't likely to boost sales at a double-digit rate any time soon. Yet parts of its business, like e-commerce, are booming today. And Walmart has a good shot at seeing faster growth in its consumer discretionary aisles once the next cyclical upturn starts there. In the meantime, investors can simply hold this relatively stable business in their portfolio and allow dividend reinvestments to amplify their returns over the long term.
