Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Wal-Mart Stores Inc. vs. Home Depot

By Dan Caplinger - Apr 4, 2016 at 11:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Which of these big-box retailers is the smarter pick to add to your portfolio right now?

Image: Home Depot.

Big-box retail has been around for decades, and companies have taken advantage of the format in different ways. Wal-Mart (WMT -6.79%) became the largest retailer in the world by embracing a department-store concept, aiming to include the widest variety of products available. The Home Depot (HD -5.24%) took a more specialized approach, becoming the leading retailer of home-improvement materials for use by do-it-yourselfers and professional contractors. Let's compare the two on several key measures to see which one looks more favorable as an investment today.

In terms of recent share-price performance, Home Depot has given its investors a much better return than Wal-Mart. Home Depot stock returned 20% since April 2015, while Wal-Mart has lost 12% over the same period, even including the dividends it has paid.

You can see the impact of those opposite moves in their basic share price valuations. After Home Depot's solid returns, it's trading at nearly 25 times trailing earnings, which is above the market average. By contrast, Wal-Mart carries a trailing earnings multiple of just 15, and that's below where the typical stock trades right now.

As we'll see in more detail later, one reason investors are assigning Home Depot a higher valuation is because of its immediate growth prospects. When you look at future earnings projections, the valuation disparity narrows substantially. Wal-Mart has a forward earnings multiple of about 16, reflecting anticipated declines in earnings in the near-term. Home Depot is still more expensive on a forward basis, but its multiple falls to 19. Still, based solely on these simple valuation measures, Wal-Mart is the cheaper stock.

From a dividend perspective, Wal-Mart also has an advantage over Home Depot. Wal-Mart's yield is currently approaching 3%, compared to Home Depot's current yield of just over 2%. Both companies have dividend payout ratios in a range of between 40% and 45% of earnings, showing a similar dedication to returning capital to shareholders.

Wal-Mart also has a longer history of consistent dividend growth than Home Depot. Home Depot has done a good job of boosting its payouts lately, tripling its dividend since 2009 and raising its payout by 17% earlier this year. However, Wal-Mart's 43-year track record of consecutive annual dividend increases dwarfs Home Depot's history, and even the fact that Wal-Mart has made only minimal increases in recent years doesn't take away the value of its higher yield.

The biggest difference between Home Depot and Wal-Mart, however, is in their respective growth prospects. Home Depot has been growing at a quick pace, posting comparable-store sales growth of almost 9% in its most recent quarter. The home-improvement retailer's strategy of courting not just do-it-yourself shoppers but also contractors has paid off with increased customer loyalty, and initiatives to expand its e-commerce channel to allow online ordering for in-store pickup and mobile app availability have showed good signs of success.

By contrast, Wal-Mart has struggled lately. U.S. comparable-store sales growth weighed in at less than 1% during its most recent quarter, and Wal-Mart has begun making sizeable investments both in its workforce through higher wages and in its e-commerce infrastructure in order to fight back against online retail specialists. Efforts to answer the challenge that dollar stores are posing to its market share haven't had the success investors want to see, and the end of the Wal-Mart Express small-store format means that the company will have to rely even more on its superstores for growth.

Wal-Mart's cheaper valuation and higher dividend yield reflect its lower growth expectations, which is why  some bargain hunters would likely prefer its stock to that of Home Depot. For investors who prefer stronger growth prospects, however, Home Depot looks like the better buy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$122.43 (-6.79%) $-8.92
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$285.18 (-5.24%) $-15.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.