The Dow Jones Industrial Average (DJINDICES:^DJI) has had a bit of a rough week, and it's continuing its slide today, dropping 210 points by 3 p.m. EDT after Cisco and Wal-Mart (NYSE:WMT) reported disappointing quarterly results. Trading volume has been low, but that's typical of August, especially as earnings season winds down. Putting all the short-sightedness of Wall Street and quarterly reports aside, is retail juggernaut and Dow member Wal-Mart a buy, hold, or sell in today's market?
Break it down
To better understand where Wal-Mart derives its profit, let's break it down. For the 2013 fiscal year, the company's Wal-Mart U.S. brought in 59% of sales and 71% of profit. Sam's Club brought in 12% of sales for 7% of profit, while Wal-Mart international raked in 29% of revenue and 22% of profit.
With more than 100 million people walking through Wal-Mart stores every week and worldwide sales topping $400 billion annually, the company is able to leverage its massive size with suppliers to secure its "everyday low price" competitive advantage. Consider that roughly a year ago Wal-Mart planned to invest $2 billion in price cuts through 2014, but that has now expanded to $6 billion by 2017, which will pressure margins. While the low-cost advantage strengthens its economic moat, the lowering of prices could lead to shrinking margins, especially considering that competition from Costco and Amazon will increase in the years to come.
Another development for investors to keep an eye on is Wal-Mart's Neighborhood Market stores. The smaller store format enables Wal-Mart to open up more stores in the top 15 metropolitan markets, where it is more costly and difficult to open supercenters. The Neighborhood Market stores' return on invested capital has reached the levels of their supercenter counterparts, and that should help with their expansion from 200 stores to more than 500 by the end of 2016.
As sales continue to grow at slower-than-expected rates in both mature and emerging markets, Wal-Mart has been forced to lower its profit estimates for the year from a range of 5% to 6% to between 2% and 3%, and that may be a trend that continues.
The company itself faces some headwinds both near-term and long-term, but what about the stock as an investment?
One thing Wal-Mart has going for it as an investment is its ability to return value to shareholders. The company consistently increases its dividend payments and continues to lower its shares outstanding, both of which return value to its investors. Consider that over the last five years, Wal-Mart has nearly doubled its dividend and reduced shares outstanding by almost 20% -- see below:
Ultimately, Wal-Mart's low-price competitive advantage and focus on returning value to shareholders make it a worthwhile component in portfolios if you already own the stock. It's a stable, financially sound company, but it obviously isn't going to get you the returns a growth stock would. Wal-Mart's stock seems fairly priced, its core customers have been slower to recover in this economy, and retail sales are weak overall. Therefore I believe better investment options are available.
Fool contributor Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.