Reading the headlines might make you nervous about stock investing. After all, you're hearing about tariffs, stubborn inflation, and the possibility of a recession.
Nonetheless, it's imperative to take a long-term view. Granted, it's more challenging during volatile market movements, but it's impossible to predict short-term movements. Buying strong businesses, despite short-term fluctuations, typically rewards shareholders.
Walmart (WMT +0.10%) has long been a successful retailer. While it's a competitive industry, the company remains formidable, and here are a few reasons why I think it should be part of your portfolio.
Image source: Getty Images.
1. Simple business, well executed
Many companies try to contain costs. But it's deeply ingrained into Walmart's culture. Since opening the first discount store in the early 1960s, management has been focused on keeping costs low so that it can pass those savings on to customers in the form of low prices.
Indeed, you'd be hard pressed to find competitors that can undercut Walmart's prices. No wonder the retailer serves more than 250 million shoppers every week at its stores and websites.
Clearly, its plan is working. You can see the proof in its results. Walmart generated over $680 billion in revenue in the latest fiscal year (ended Jan. 31), up 5.6% after removing foreign currency translation effects. Its adjusted operating profit increased 9.7% to $29.7 billion.
2. Attracting a crowd
Of course, the past doesn't guarantee future results. However, with the business in a good place, it's well positioned for future growth.
With its ultra-low prices, Walmart always attracts crowds. But it draws more customers during difficult economic times, including the current inflationary environment.
In the fourth quarter, same-store sales (comps) in its core U.S. segment increased 4.6%. Importantly, more than half, 2.8 percentage points, came from higher traffic.Walmart has gained market share over its rivals, and it's attracting a higher-income demographic.
With economic uncertainty from higher tariffs, including higher costs and a potential recession, Walmart's low prices put it in a good position to grow customers and revenue. It's one of the rare businesses that financially benefits during difficult economic times.
3. Investing for the future
Management hasn't rested on its laurels. Walmart invested in technology initiatives that have kept it in a strong competitive position and continues to look toward the future. It plans to spend 3% to 3.5% of sales on capital expenditures this year. With sales approaching $700 billion, that's a large figure.
Walmart has invested to ensure a better consumer experience. This includes online ordering and pickup in stores. Many locations offer same-day delivery.
Walmart has also pushed into other areas. This includes Walmart+, a subscription service that provides things like free shipping, a more efficient checkout process, and discounted gas.
With its huge customer base, Walmart has a lot of data. It uses this in its advertising business. Although currently totaling less than 1% of the company's annual revenue, it grew 27% last year. However, advertising is a very profitable business. While it will undoubtedly take time, this could become a major revenue contributor down the line.
Putting it all together
Ultra-low prices, convenience, and a management team committed to investing to maintain its competitive edge adds up to an attractive long-term investment.
Of course, the stock price reflects investors' high expectations. The share price has gained nearly 39% over the past year through March 13, outpacing the S&P 500 index by about 20 percentage points at the time of this writing.
NASDAQ: WMT
Key Data Points
Walmart's shares sell at a price-to-earnings (P/E) ratio of 35 compared to 28 for the S&P 500.
If the valuation gives you pause, you can steadily invest funds since you're planning on holding Walmart's shares for a long time. Dollar-cost averaging allows you to smooth out your purchases since you commit the same dollar amount at regular intervals.
