Walmart (WMT 0.13%) started with one discount store and grew into the world's largest retailer. While that's impressive, investors can't rely on past history to gauge future returns. After all, many previously successful retailers, such as Sears and Toys R Us, ended up in bankruptcy.
I'm not suggesting the same fate awaits Walmart, but it does mean it's important to dig into a company's prospects. It's time to assess Walmart's fundamentals.
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Lowest prices
Since the retailer's beginning, management has had a simple formula: to keep costs low and pass these savings on to customers. The company seeks to offer everyday low prices. In fact, shoppers are hard-pressed to find lower prices elsewhere.
As the years have gone by, it has been able to use its size to achieve economies of scale and greater bargaining power with suppliers. Walmart serves 255 million customers every week across its 10,500 stores and websites.
It continues to grow sales and profitability. Walmart's fiscal 2024 adjusted revenue grew 4.9%, pushing operating income 10.2% higher. This removes foreign currency translation effects.
Management expects sales to increase by 3% to 4% this year, leading to 4% to 6% operating income growth. It'd be nice to see profits grow quicker. but management continues investing, setting up nice long-term growth.
Not standing pat
Fortunately, management hasn't stood still while other competitors, such as behemoth Amazon, have emerged. It continues to take steps to move Walmart forward.
For instance, it has continued developing omnichannel capabilities. It now offers same-day pick-up at many locations, and Walmart+ is a subscription service that offers free shipping, delivery from stores, gas discounts, and more efficient checkout. And its e-commerce business sales grew an impressive 23% in the fourth quarter, to $100 billion.
Management has also been growing its advertising business. Advertising generated $3.4 billion in sales last year, up 28%. Management announced it would acquire television maker Vizio, with its access to data, to boost the business. While advertising has the potential to become significant, it's currently 0.5% of last year's revenue.
Higher dividends
Walmart shareholders have become accustomed to receiving higher dividends annually. And this year was no exception. The board of directors recently announced a 9% dividend hike. The large increase sends a signal about management's optimism. It also extended Walmart's streak of dividend raises to 51 straight years, and Walmart has become a Dividend King.
Walmart has the free cash flow (FCF) to support these payouts. It generated $15.1 billion in FCF last year. That easily covered the $6.1 billion in dividends. The stock currently offers a 1.4% dividend yield.
The decision
Walmart's share price has increased about 24% in the past year. But it sells at a better valuation. Its price-to-earnings (P/E) ratio fell from 36 to 31. By comparison, the S&P 500 trades at a 29 P/E multiple.
While management expects slower profit growth this year, Walmart's higher dividends, new initiatives, better valuation, and ability to attract customers even during trying economic times add up to an attractive purchase opportunity.
