The term "Dividend Aristocrats" is used to describe stocks that have raised their dividend for at least 25 consecutive years. And Wal-Mart (NYSE:WMT) is certainly one of these, having raised its payout for 39 years in a row.
Many investors avoid stocks like Wal-Mart simply because they are perceived as having "maxed out" their market share, and have very little room left to grow. However, in Wal-Mart's case, this simply isn't true.
Despite being somewhat limited in the number of new stores the U.S. market could reasonably accommodate, Wal-Mart is finding other ways to innovate by creating new partnerships and offering more products and services to the loyal customer base it already has. Also, Wal-Mart trades for a relatively inexpensive valuation, and has an excellent track record of growing its dividend and unlocking value for its shareholders. Maybe now is as good a time as any to get in on the largest American retailer.
Same customers, new products
As would be expected from a company with more than 245 million customers through its doors each week, Wal-Mart's growth rate has slowed considerably during the past few years. In fact, the company's total square footage has grown less than 2% annually during the past several years, and is not expected to pick up much, even with the company's renewed focus on smaller "neighborhood" stores.
Instead, the company grows by continuing to become even more of a one-stop shop for its customers. Wal-Mart first added groceries to its traditional non-food retail business, and is now the No. 1 grocery chain in the U.S., with a 35% market share. In recent years, the company has added even more products and services to get customers to spend all of their shopping cash in Wal-Mart stores. In addition to traditional items, many Wal-Mart customers can now fill prescriptions, get an oil change, rent a DVD, get an eye exam, fill up their gas tanks, and eat lunch without ever leaving Wal-Mart's property.
The latest addition to Wal-Mart's offerings
Wal-Mart has offered banking services to its customers for several years now, mainly in the form of local banks with branches in its stores. However, for the first time, Wal-Mart is going to begin offering its own form of checking accounts in partnership with Green Dot, specifically targeted at its core customer base.
Specifically, through Green Dot GoBank branches located within its stores, Wal-Mart is going to offer a low-cost alternative to traditional checking accounts. The account comes with an $8.95 monthly fee, but has no possibility of overdrafts, and can be obtained by pretty much anyone older than 18 with a valid ID.
I wrote an article recently with a more in-depth discussion of Wal-Mart's entrance into the banking business, but just to throw some numbers into the equation, consider this: If Wal-Mart can convince even 5% of its existing regular customer base to sign up for an account with its own bank, it would mean more than $1.3 billion annually in fee income alone.
The addition of banking is just the latest example. And it doesn't need to stop with checking accounts, either. Once this gets up and running, what's to stop the GoBank branches from selling CDs, loan products, and other services to Wal-Mart customers.
Cheap, considering its record
During the years, Wal-Mart has done a great job of growing its income, even if its physical footprint's growth has slowed. In fact, during the past decade alone, sales have increased by 67%.
In addition, the company has a great history of raising its dividend every year. Since 2005, the company has raised its payout by an average of 13% per year, and still maintains a payout ratio of less than 40%. There's no reason to think this pattern won't continue well into the future.
Still, the company trades for a relatively low valuation of 15.9 times TTM earnings, well below the industry average of 18.1. And Wal-Mart's earnings are expected to grow by more than 8% annually during the next two fiscal years.
What if you think stocks are too expensive right now?
With the market seemingly reaching new highs every other day, investors may think things are getting a little overheated, and that a pullback is overdue. And, they may be right.
And it's precisely this group of investors who need Wal-Mart in their portfolios, as it tends to do extremely well during tough economic times. In fact, from late 2007 until March 2009, as the S&P 500 shed more than 45% of its value, Wal-Mart produced a total return of nearly 25% for its shareholders.
The smartest investors in the world know that success over the long run isn't about how well you do when the market is on fire; it's about doing better during the bad times. Wal-Mart performs better than most when things go sour.
Matthew Frankel 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.