Dividend Monk

Disciplined Dividend Stock Research

DivGuy

3M Company (MMM) Dividend Stock Analysis

By DivGuy 3 Comments

Summary

-3M Company is a diverse conglomerate with a reasonable dividend yield and a reasonable valuation on top of decent growth prospects.
-Revenue, earnings, and cash flow have grown slowly over the past 5 years, in the range of about 3% per year each, but growth was fairly strong before the onset of the recession.
-The dividend yield is about 2.60% with a 41% payout ratio.
-The company has a conservative (fairly low debt) balance sheet, which is a great thing.
-I find the current price in the low $80s to be reasonably attractive with thought towards the long term.

How to Read My Stock Analysis Reports

Overview

3M (symbol MMM), once called the Minnesota Mining and Manufacturing Company, was founded in 1902. The company, now with nearly 70,000 employees, produces products like Scotch tape, projector systems, Post-it notes, Tartan track, and Thinsulate. This is a conglomerate that produces products many industries and for both personal and business use, and their manufacturing, research, and sales offices are all over the world.

Business Segments

The company is divided into six business segments:

Consumer and Office Business
This segment provides solutions for the home and office, and includes well-known products like Scotch tape. This segment accounts for about 14% of sales.

Display and Graphics Business
This segment provides display films, reflective materials, projection systems, and the like. This segment accounts for about 14% of sales.

Electro and Communications Business
This segment provides solutions for electrical and communications industries by means of tapes, splicing, and connectivity. This is the smallest segment, contributing about 10% of sales.

Health Care Business
This segments provides several products in the areas of wound care, oral care, drug delivery systems, and more. This segment has the highest profit margin and accounts for about 17% of sales.

Industrial and Transportation Business
This segment provides adhesives, abrasives, filtration systems, fasteners, and specialty materials to a variety of industries from renewable energy to aerospace. This is the largest segment, accounting for about 32% of sales.

Safety, Security, and Protection Services Business
This segment provides several safety products like respiratory protection, eye and ear protection, building safety solutions, and more, and accounts for about 13% of sales.

Revenue, Earnings, Cash Flow, and Margins

3M has had fairly low growth over this past half-decade. The growth is atypical in part due to the global economic crisis of these past couple years.

Revenue Growth

Year Revenue
2009 $23.123 billion
2008 $25.269 billion
2007 $24.462 billion
2006 $22.923 billion
2005 $21.167 billion
2004 $20.011 billion

Over these 5 years, 3M has had an average of 3% annual revenue growth. The period between 2004 and 2008, however, shows 6% average annual revenue growth.

EarningsGrowth

Year Earnings
2009 $3.193 billion
2008 $3.460 billion
2007 $4.096 billion
2006 $3.851 billion
2005 $3.104 billion
2004 $2.833 billion

3M has had 2.5% earnings growth over this 5-year period.

Cash Flow Growth

Year Cash Flow from Operations
2009 $4.941 billion
2008 $4.533 billion
2007 $4.275 billion
2006 $3.839 billion
2005 $4.204 billion
2004 $4.228 billion

Cash flow for 3M has grown at an average of 3% annually over this period.

Profit Margin

3M has a 15% profit margin.

Dividends

The company currently has a dividend yield of about 2.6% and has a long history of dividend increases.

Dividend Growth

Year Dividend Yield
2009 $2.04 2.70%
2008 $2.00 2.80%
2007 $1.92 2.30%
2006 $1.84 2.60%
2005 $1.68 2.20%
2004 $1.44 1.80%

Annual dividend growth over this period has been over 7%, which is pretty good. Dividend growth has slowed, however, since the start of the recession.

The payout ratio is currently about 41% which is moderate and safe. This provides plenty of room for dividend growth into the future.

Share Repurchases

Over the past four years, 3M has repurchased several billion dollars worth of stock and has issued some stock as well. The net reduction in shares over the past four years is only a few percent of the current market capitalization.

Balance Sheet

For 3M, the LT Debt/Equity ratio is 0.37 and the Total Debt/Equity ratio is 0.43. This is a fairly conservative balance sheet, which is a great thing.

Investment Thesis

3M is a diverse company that provides solutions all over the world. To put it as bluntly as possible, 3M produces the “stuff” that we may take for granted that helps everything else run. They produce the tapes, the materials, the films, and so forth, that allow homes, offices, and equipment to work properly. A lot of people don’t realize how much thought and complexity has to go into things that seem fairly simple, and instead we focus on the final product or the final service. 3M, on the other hand, focuses on the little things in a big way.

Because the products are so diverse and so necessary, 3M doesn’t seem to be going anywhere anytime soon. Unlike many companies, there is no loss of a single industry that could permanently disrupt them, or some new technology that could quickly make them obsolete, or some competitor that could figure out how to do everything 3M does except better.

In a recent presentation, 3M has highlighted several specific areas that seem to have good growth prospects for itself. Some of these include:
-Water Infrastructure
-Renewable Energy
-Projection Systems
-Aerospace
-Health Care Purification
-Health Care in Developing Countries
-International Consumer Products
-and basically anything involving China

Some of these are areas that 3M is already involved in and others are areas that 3M is interested in getting into.

The company has research and development facilities all over the world. Some of their recent facilities are in Poland, Russia, Korea, China, Singapore, South Africa, and Brazil.

In 1998, emerging markets contributed 16% to 3M sales. In 2009, this number was 29%.

3M is an interesting combination of research and development into new products and an impressive world distribution system. It is a large and stable organization, yet not so big to make significant growth difficult.

Risks

Like any company, 3M has risks. Their recent profit and revenue decreases were a result of the global recession. 3M does well when their business customers do well because they sell more products. For 3M to operate successfully they will continue to need a reasonably healthy world business environment.

Conclusion and Valuation

In conclusion, 3M is a great and diverse company with a good dividend history and a reasonable payout. The balance sheet is strong and the valuation is quite reasonable.

EPS for 2009 was $4.69. Projected EPS for 2010 and 2011 are $5.63 and $6.21 respectively. At the current price of about $81, this comes to a P/E of 17.2 for 2009, 14.4 for 2010, and 13 for 2011. These are of course not necessarily reliable, but I do believe 3M will make up the earnings ground it has lost in this recession and then some.

Full Disclosure: I do not have any position in MMM at the time of this writing.
You can see my full list of individual holdings here.

Further reading:
Emerson (EMR) Dividend Stock Analysis
Wal-Mart Stores (WMT) Dividend Stock Analysis
Automatic Data Processing (ADP) Dividend Stock Analysis
Waste Management (WM) Dividend Stock Analysis
8 Reasons to go with Dividends

Emerson Electric Company (EMR) Dividend Stock Analysis

By DivGuy 7 Comments

Summary

-Emerson Electric Company (EMR) is a broad technology company that sells necessary products around the world.
-Revenue growth over the past five years has averaged around 6% per year.
-Earnings growth over the past five years has averaged a little over 6% per year.
-Cash flow growth over this same time period has averaged around 7% per year.
-Annual dividend growth has been over 10% during this time period, and the company has increased its dividend for 53 consecutive years.
-Shares look reasonably valued at the current price in my opinion.

How to Read My Stock Analysis Reports

Overview

Emerson Electric Company (symbol EMR) is a Fortune 500 conglomerate technology company based in Missouri. The company was founded 120 years ago and provides a very large array of technology products and services. The company draws 45% of its revenue from the United States, 21% from Europe, 21% from Asia, and 13% from other places of the world. With over 140,000 employees, Emerson uses its technology to help the world run.

Business Segments

The company currently consists of five business segments:

Process Management
Emerson’s largest business segment, Process Management, accounts for 29% of revenue. The Process Management segment provides control systems, monitoring systems, asset optimization, components, and services. Only about one third of the revenue from this particular segment comes from the United States, with the rest being spread out rather equally from Europe, Asia, and the rest of the world. This was Emerson’s most resilient segment in the face of the deep recession.

Network Power
Emerson’s Network Power segment accounts for 25% of revenue. In this segment, Emerson provides power products and solutions for data centers and telecommunications networks. This includes AC power systems, DC power systems, cooling systems, embedded computing and power, and service (including 24-hour service). Only about 40% of the revenue from this particular segment comes from the United States, with Asia accounting for another 32% of this revenue.

Industrial Automation
Emerson’s Industrial Automation segment accounts for 17% of revenue. They provide a variety of automation products for companies, including industrial equipment, power systems, motors and drives, mechanical power transmission, and fluid automation. Revenue from this particular segment comes strongly from Europe and the United States, though Asia and other areas provide revenue as well.

Climate Technologies
Emerson’s Climate Technologies segment accounts for 15% of revenue. Emerson provides compressors, temperature controls and electronics, and sensors, as well as a variety of other products and services, to provide homeowners and businesses with the tools needed for heating, air conditioning, refrigeration, and overall climate control. Slightly over half of the revenue from this particular segment comes from the United States, while the rest is spread out fairly equally around several other parts of the world.

Appliances and Tools
Emerson’s Appliances and Tools segment accounts for 14% of revenue. They produce a variety of products in this segment, ranging from commercial motors to ceiling fans. Over 80% of the revenue from this particular segment comes from within the United States.

Revenue, Earnings, Cash Flow, and Margins

Emerson was hit hard by the recession, as they sell many of their products and services to businesses that encountered severe financial troubles. The company, however, has decades of consistent growth, through peaks and recessions. They maintained profitability throughout the low point in the economy.

Revenue Growth

Year Revenue
2009 $20.9 billion
2008 $24.8 billion
2007 $22.6 billion
2006 $20.1 billion
2005 $17.3 billion
2004 $15.6 billion

Emerson has an average annual revenue growth of approximately 6% over the past five years.

EarningsGrowth

Year Earnings
2009 $1.724 billion
2008 $2.412 billion
2007 $2.136 billion
2006 $1.845 billion
2005 $1.422 billion
2004 $1.257 billion

This represents between 6% and 7% average annual earnings growth over the past five years.

Cash Flow Growth

Year Cash Flow
2009 $3.086 billion
2008 $3.293 billion
2007 $3.016 billion
2006 $2.512 billion
2005 $2.187 billion
2004 $2.216 billion

Emerson has grown cash flow by about 7% on average per year over the past five years.

Profit Margin

Emerson currently has a profit margin of over 8%.

Dividends

Emerson has increased their dividend for 53 consecutive years, which is absolutely remarkable. For over half of a century, there has not been one year where Emerson did not raise their dividend for shareholders.

Dividend Growth

Year Dividend Yield
2009 $1.325 3.30%
2008 $1.23 2.50%
2007 $1.0875 2.30%
2006 $0.93 2.30%
2005 $0.845 2.50%
2004 $0.8075 2.60%

Over these past five years, Emerson has raised its dividend by over 10% per year on average. Between 2009 and 2010, however, Emerson decided to only raise its dividend by a tiny 1.5%; a token increase to preserve its unbroken chain of dividend increases.

EMR’s dividend payout ratio is currently about 60%, and their dividend yield is about 2.9%. So the payout is moderate in size and quite safe.

Share Repurchases

Over the past four years, Emerson has repurchased approximately $3.5 billion worth of its own shares. This corresponds to about 10% of its current market capitalization.

Balance Sheet

Emerson Electric has a LT Debt to Equity ratio of 0.52 and a Total Debt to Equity ratio of 0.66. This company has a very reasonable amount of debt, as this is neither very high nor very low.

Investment Thesis

Emerson produces technology and services that keep the world running. Process Management control systems allow manufacturers to do what they do, and Network Power allows data centers and telecommunications networks to do what they do. The segments of this large business provide the necessary tools to keep the developed world operating as it does, and help the developing world continue to improve the standard of living. Fundamental backbone infrastructure requires companies like Emerson to exist and grow. As the world continues to develop and modernize, Emerson has an ocean of opportunities to grow as long as it can continue to compete.

Emerson is an engineering company that doesn’t require a huge amount of technical expertise to invest in. The products are straightforward, easily understood in principle, and not flashy. They sit in the back room and keep the business running.

Even in the deepest part of the recession, although EMR was very much affected, the company continued to produce a profit. Their stable financial condition, necessary products, and geographical spread around the world allowed them to weather the storm.

Combine these necessary products with a company culture that has produced over a half-century of consecutive dividend increases, I expect Emerson to continue to do well for years to come. Their balance sheet and cash flow are fairly strong, and the company exists within growing industries and operates around the world.

Risks

Like any company, Emerson has risks. Notably, Emerson took a rather large financial hit in this recession. EMR is reliant upon the health of businesses around the world to continue to operate, and has a variety of competitors from around the globe.

Conclusion and Valuation

Emerson stock is not cheap right now with a P/E of about 20. Still, I think in the long term, EMR is going to prosper as a company. I personally think $46 represents a reasonable entry price for this stock at this time.

Full Disclosure: I own shares of EMR at the time of this writing.
You can see my full list of individual holdings here.

Further reading:
Wal-Mart Stores (WMT) Dividend Stock Analysis
Automatic Data Processing (ADP) Dividend Stock Analysis
Waste Management (WM) Dividend Stock Analysis
Pepsico (PEP) Dividend Stock Analysis
8 Reasons to go with Dividends

Second Step to Building Wealth: Attain Positive Cash Flow

By DivGuy 8 Comments

This is the second in a series of eight articles expanding on the steps of the article:
8 Steps to Build Wealth

Step 2: Attain Positive Cash Flow

In order to begin putting money to work for you to grow exponentially and provide passive income, you first of course have to earn some money. This can be from a job or your own business, and is an obviously necessary step in building wealth.

What I mean by positive cash flow is that you need to ensure that the money coming to you exceeds the money that you pay out during the same time period. Many people maintain a small or negative cash flow, meaning that they spend most of the money that they bring in, or might even spend more money than they bring in. If you’re going to build wealth, you need to find ways to ensure that your income greatly exceeds your expenses.

Increasing Income

There are many ways to improve one’s financial situation in life, and increasing your income is a primary way to do this. It could involve investing in education for yourself, investing in your business, or finding other ways to increase your marketability as an employee. This is for you to figure out, as this site is not about careers. There are plenty of resources to help you along your path, and if you are reading this, they are likely available to you.

In addition to these primary methods, there are other ways to develop additional income streams. You can start a website, a small business, turn a passion or hobby into a part-time income stream, or any other of a variety of options limited only by your creativity and your desire. You may be content with your current level of income, or you may seek more, so depending on your situation, the importance of increasing your income will vary.

Decreasing Expenses

While improving income is important, decreasing expenses can’t be overlooked. A high income doesn’t necessarily lead you to wealth, as can be seen by the fact that plenty of expensive homes have been foreclosed in this recession. In fact, I’d say that most people place too much importance on income when it comes to building wealth. Even if your income isn’t very high, you can still build a significant amount of wealth if you keep your expenses far lower than your income. Here are a few pillars for achieving this:

-Reject Consumerism
Much of the world today is obsessed with the concept of buying, buying, and buying some more. It’s basically expected of you. It’s a given that your car and your house will match your career and income, even if you have no real desire to own an expensive car or expensive house, but that doesn’t have to be the case. As I mentioned in step 1 of this series, building wealth generally implies that you must go against what is normal and average. Do things that you want to do, not what is normal to do.

-Embrace Minimalism
Sometimes the best things in life are inexpensive or free. Some of the best experiences are ones that you make for yourself, some of the best meals are home-cooked meals, and some of the best times are those spent in nature or with loved ones.

A big source of income drain is your car, and some people cycle through cars every few years. Often the best type of car is an inexpensive (but safe and reliable) car that frees you of worry. In fact, my favorite car I ever had was a 10-year-old used car that ran great and looked pretty good too. I liked it so much because I didn’t have to worry about it. If someone bumped or scratched it, that was completely fine with me, because its financial magnitude was not very significant to me and I cared little for the superficial appearance of it. I took good care of it of course, but wasn’t burdened with worry and protectiveness for a simple material possession. This is in contrast to a car that is worth up to a half-year’s worth of income, as some people tend to buy.

When you own something that is so expensive compared to your means, it instills worry and possessiveness in you. Most material possessions decay and diminish, and trying to preserve them is a constant uphill battle. The wise choose their battles carefully.

-Fight Against Expense Inflation
As most people grow their income over their lifetime, their expenses grow as well. They begin to have more money to spend, so naturally they spend more money, and therefore their net positive cash flow doesn’t really increase as much as it could. Ideally, you want your income to grow more quickly than your expenses, so that each year you can devote more resources towards your long-term goals.

This is such a hard thing to do because it can be difficult to measure. A good way to measure it is to keep track of how much new money you add to your investments each year, and ensure that each year has a higher total of money added than the year before. This makes measuring it simple because you only have to focus on one variable- the amount of money you put away each year. Things come up in life that increase your expenses, such as marriage, kids, health issues, home expansion, and unexpected problems, but keep your eyes focused on making sure that each year, you put more money away for the long-term than the previous year. Some of these things, especially family, are far more important than building wealth, but don’t use them as excuses for why expenses are out of control.

-Don’t Become Obsessed
I put a lot of emphasis on minimalism and simple living, but it’s generally unhealthy to be obsessed with it. Striking a balance that is appropriate for you is important. It’s fine to splurge sometimes as long as your long-term view remains intact. Constantly improve, but give yourself a little bit of leeway to keep yourself from burning-out or becoming disillusioned.

Have fun with it! Building wealth should be an enjoyable process, not a burden. View it as a construction in your life; a masterpiece. Sure, it takes some time and some resources, but it’s also a work of achievement and passion.

First Step to Building Wealth: Decide to Build Wealth

By DivGuy 11 Comments

This is the first in a series of eight articles expanding on the steps of the article:
8 Steps to Build Wealth

Step 1: Decide to Build Wealth

In order to build wealth, this step is not only the first chronologically, but also the first in importance. Unfortunately and perhaps counter-intuitively, it’s also a very overlooked step. Plenty of people would like to be wealthy, but very few actively decide to set out on a path to build wealth. If you choose to do so, you’ll be standing out from the crowd.

Most people I’ve talked to view money as a means for gratification. These people spend much of what they make (or sometimes more than what they make), and although they may put some money away for retirement, or for a house, their primary concern is to afford the lifestyle they want in the present. This viewpoint is indeed somewhat valid. When someone works hard for money, it’s only natural that they want to enjoy the fruits of their labor. Life is in part about experiencing new things, and some of these experiences do have an economic cost.

There are some that wish to take wealth to the next step- to focus on building some real wealth that exponentially grows over the course of their lifetime. Wealth can mean abundance, freedom, success, and most importantly, the ability to shape the world in some small way as you see fit- for better or worse. Money can be used to build and to help, and also to destroy and to deny. If you develop passive income that supports your lifestyle, you are free to direct your energy and your remaining resources to what you are passionate about.

Wealthy people, by definition, are in the minority. Wealth is defined, generally, in reference to the rest of the culture that you live in. The standard of wealth in one country may be significantly different than wealth in another country. What this means is that in order to build wealth, you have to do something different than what is normal. Since the majority are not wealthy, you can’t follow the ways of the masses to attain wealth. You have to fight against needless consumption and credit card debt. You have to set aside money for growth each time you make it. You have to have a solid understanding of the basic principles of wealth building, investing, and business, and this requires constantly learning and growing.

The next seven steps are all about how to build wealth, but it begins with you deciding that building wealth is one of your goals. If it’s not, then don’t worry, and move on. If it is, then you have to choose to build wealth and to know that you will succeed. It’s not a goal you can be wishy-washy or uncertain about. You have to dedicate some time and some resources to making it happen and to remain confident in your goal. Money doesn’t find it’s way to good stock investments by itself; it requires financial prudence to produce abundance.

3 Reasons to Sell a Dividend Stock

By DivGuy 17 Comments

Good times, Bad times

This site provides quite a bit of information on what to look for when buying a dividend stock, so this will be an article on reasons to sell a dividend stock. Knowing when to sell a stock can be hard, especially for an investor that wishes to ideally hold onto his or her stocks for a very long time. Yet, there are certain times when selling an investment is the right thing to do.

Reason 1: Dividend Cut

If an investor invests in a company seeking long-term growing passive income streams in the form of dividends, but the company they invested in one day reduces or eliminates its dividend, then it is often an appropriate time to sell. Firstly, you’ll have lost some passive income, and secondly, other income investors are likely to reduce their holdings for the same reason. Under some circumstances it may be a reasonable decision to continue holding onto the stock, but in many instances this is one of the most clear-cut red flags that it is time to move on.

Reason 2: Major Change

If a company changes dramatically, its usefulness as an investment to you might change considerably. For context, consider reading my previous article about writing an investing thesis. In that article, I discussed the merits of writing down and saving your investing thesis, which is your summary of qualitative and quantitative reasons for purchasing the stock of that company. It’s good practice to periodically review your investments and ensure that you still own them for logical reasons. If the company has changed significantly from the way it was when you purchased it as an investment, your reasons for purchasing stock in that company may no longer exist in that company. Examples of major changes that may affect your interest in holding the stock are massive acquisitions and mergers, or a re-focusing of the business, or a huge macro-economic shift, or that the company is increasing their debt beyond the point that you are comfortable with.

Reason 3: Overpriced

“Buy low and sell high” is the mantra of a lot of investors, but is not so often spoken by dividend investors. People wise enough to avoid trying to time the market look at this phrase with a bit of skepticism, and for good reason. Many dividend investors are comfortable holding onto their investments even as they soar in value far above what they are realistically worth because they are mostly focused on the dividend income rather than the stock price.

Take a look at Coca Cola. In the late 1990s, Coca Cola’s stock price soared to incredible highs before crashing back down to reality. During the high, Coke had an astoundingly high P/E, and a dividend yield of under 1% despite paying out a considerable percentage of their profits as dividends.

What I’m not suggesting is that you try to time the market. That’s usually a fool’s errand. What I’m suggesting is that you keep tabs on the fundamental value of your stocks, and if they have grown in price to a level far beyond what you would be willing to pay today, then it may be wise to sell if you can find a better deal to put your money into. Taxes should be taken into account for the decision.

If, for example, you purchase a stock for $30 that pays $1 in dividends this year, then the calculated dividend yield of this investment is 3.33%. If, in 10 years, the profits and dividend have only increased by an average of 10% annually, but the stock price has increased by an average of 20% annually, then the stock value will be worth over $185 and it will be paying out about $2.60 in dividends that year. This is calculated to be a dividend yield of only about 1.40%. If the investor concludes that his purchase is now over-valued, he or she can sell this company and purchase perhaps a different investment that currently yields 3.33% along with considerable growth opportunities like his original investment once did. If he does this, his $185 (taxed down to perhaps $150) with a 3.33% dividend yield will give him $5.00 in dividends per year instead of $2.60. This makes a huge difference if you have a large number of shares.

I wouldn’t recommend selling due to overpricing, however, unless the stock price is significantly out of proportion with what you consider its value to be, or if the difference between the expected rate of return of the current overpriced investment is considerably less than a target investment idea, even after taking fees and taxes into account.

Parting is such sweet sorrow…

As long-term investors, and not short-term traders or speculators, many of us really do look at our portfolio as a list of companies we own. That is, of course, what a share is- a share of ownership in a company. While selling stock might be easy for someone who doesn’t look at it this way (and indeed, many people simply look at stocks as simply pieces of paper that fluctuate in value), it can be difficult for someone who has a more fundamental view of investing and holding. While we’d like all of our investment choices to be perfect ones, where our holding period is “forever” as one famous investor would say, some of them will inevitably not be.

All in all, I do think it’s better to be someone who has a tendency to continue to hold stocks when it is no longer appropriate to do so, than to be someone who doesn’t hold onto their stocks for as long as they should and is far too quick to sell under a variety of scenarios. Nonetheless, it makes sense to periodically review your investments to ensure that they still make sense.

Wal-Mart Stores Inc (WMT) Dividend Stock Analysis

By DivGuy 11 Comments

Summary

-Walmart (WMT), among the largest companies in the world, appears to be a good option for placement consideration in a dividend growth portfolio.
-Four year average revenue growth: 7%
-Four year average earnings growth: 6% (with EPS growth of 8%)
-Four year average cash flow growth: 10%
-Moderate debt levels, a 2.35% dividend yield, and significant share repurchases
-The stock currently has a P/E of about 13.5, which is a pretty good deal on this type of company.

How to Read My Stock Analysis Reports

Overview

Everyone knows Walmart. Founded in Arkansas in 1962 by Sam Walton, Walmart is now one of the largest companies in the world, with revenue of over $400 billion and with more than 2 million employees. They have stores under a variety of brands in 15 countries around the world. In addition to being a massive retailer, it’s the largest seller of groceries in the United States. Walmart also owns Sam’s Club, which is a membership warehouse much like Costco that offers bulk products for a reduced cost to people that pay for a membership.

Currently, 63.8% of revenue comes from Walmart US, 24.7% comes from International, and 11.5% comes from Sam’s Club.

Walmart is a rather infamous business. It’s criticized for destroying ma and pa businesses and for harsh and discriminatory employee treatment. On the other hand, Walmart has helped save consumers money on everyday items. When hurricane Katrina struck the United States, Walmart used its enormous and efficient logistics system to provide supplies and aid, along with money, faster than the US federal government could respond.

Revenue, Earnings, Cash Flow, and Margins

Walmart’s fiscal year ends in January, so for instance when they report numbers for 2010, the numbers are really for 2009.

Revenue Growth

Year Revenue
2010 $405 billion
2009 $401 billion
2008 $374 billion
2007 $345 billion
2006 $309 billion

Over this time period, WMT has grown revenue by an average of 7% per year.

EarningsGrowth

Year Earnings
2010 $14.4 billion
2009 $13.3 billion
2008 $12.8 billion
2007 $12.2 billion
2006 $11.4 billion

Over this time period, WMT has grown earnings by an average of 6% annually.

While company-wide earnings have grown by 6% per year on average, earnings-per-share (EPS) has increased at a faster pace. For 2006, EPS was $2.72 while EPS in 2010 was $3.72. This translates into more than 8% annual EPS growth. EPS growth is larger than total earnings growth because WMT continually repurchases and cancels some of its own shares, meaning that the earnings become distributed over a small number of shares, and therefore each share receives a larger portion of the earnings.

Cash Flow Growth

Year Cash Flow
2010 $26.2 billion
2009 $23.1 billion
2008 $20.3 billion
2007 $20.1 billion
2006 $17.6 billion

WMT has grown cash flow by approximately 10% per year on average over this time period.

Profit Margin

WMT currently has a profit margin of about 4%, up from their five-year average profit margin of 3.4%. This may seem pretty low, but retailers typically have some of the lowest profit margins around.

Dividends

Walmart currently has a dividend yield of about 2.35% and has a high dividend growth rate combined with a low payout ratio.

Dividend Growth

Year Dividend Yield
2010 $1.09 2.20%
2009 $0.95 1.60%
2008 $0.88 1.90%
2007 $0.67 1.40%
2006 $0.60 1.20%

WMT has grown their dividend by an average of about 16% over this time period, which is very good. The current dividend yield is over 2.3%, among the highest yield that Walmart stock has recently offered, though still mediocre compared to many other dividend stocks.

WMT currently has a payout ratio of around 30%. This means that they pay 30% of their income to shareholders as dividends, and this is a somewhat low number. The company has plenty of room to substantially grow the dividend over the next several years.

Share Repurchases

WMT repurchases a varying amount of shares each year. Their total share repurchases over many of the recent years have exceeded dividend payouts, meaning that WMT is redirecting most of its income to shareholders. Recently, WMT authorized another $15 billion in share repurchases.

Balance Sheet

WMT currently sports a fairly solid balance sheet. They have a LT Debt/Equity ratio of 0.54 and a Total Debt/Equity ratio of 0.71. This implies that WMT is using a manageable amount of leverage in order to grow its business while remaining financially safe.

Investment Thesis

It’s important to invest in companies that have durable competitive advantages over their rivals, and WMT is just that sort of company. Due to Walmart’s immense size, they can purchase products in enormous quantities for very low prices, and then pass those low prices to their customers, thereby beating the prices of most rival retailers. This creates a catch-22, or a negative loop, for rival companies, because in order to grow in size they need customers, but Walmart draws customers away from them with their lower prices, and these rivals can’t usually match those prices because they aren’t large enough. In order to compete with Walmart, companies have to find new ways to offer low prices. Online retailers can cut costs by eliminating many expenses associated with a brick-and-mortar business. Costco derives most of its income with its membership fees, and therefore sells its products at nearly the same price it purchased them in order to try to keep prices low. Still, Walmart is indeed in a very strong and difficult-to-shake position among retailers.

The main growth area for WMT will rely outside of the United States. Walmart has 3,708 retailer locations in the United States and 4,112 locations in other countries, along with 596 Sam’s Club locations. Their number of locations internationally nearly doubled over the past 4 years, while their number of US locations only had about a 13% increase over the same time period. Although ethical or economic questions may arise as to whether something like Walmart should continue to grow, there is basically nothing stopping it from continuing to grow. Their business is straightforward, they generate tons of cash, and they can use that cash to open or acquire new locations in places around the globe. The scalability of this industry is nearly limitless.

In addition, WMT is recession-resistant. In some ways, it even does well in a recession as consumers flock to cheaper options. The company has also been improving the quality of some of its stores to cater to a different demographic group.

Walmart constitutes much of the wealth of the Walton family, so shareholder growth is aligned with management objectives. It’s good to find companies that are at least family owned.

Although it’s difficult for such a large company to grow at a rate that is enticing for investors, WMT seems to offer a reliable and steady growth story combined with dividends and share repurchases to offer a pretty good value. At the current time, the stock has a P/E of only around 13.5. It seems as though Walmart’s stock, along with everything they sell, is at a fairly low price. In comparison, Target is trading with a P/E of about 1.5 and Costco is trading with a P/E of nearly 21. Costco is in my opinion certainly worth a higher valuation, but not by this much of a margin.

Risks

Walmart, like any other company, has risks. When all is said and done, Walmart is really just a middle-man, buying products of others and selling them to you. They are vulnerable to changes in consumer demand.

In addition, Walmart faces some pretty harsh criticism. They are viewed negatively when it comes to treating their employees well, and also have faced numerous charges of gender discrimination. Their rival Costco is known for taking much better care of their employees, and that can go a long way. They also face criticism as part of a larger wave of big businesses that put smaller businesses out of business by being too efficient.

Conclusion and Valuation

Overall, WMT seems to be a healthy and growing large company with a low valuation. The stock may deserve placement as a conservative pick in a dividend-growth portfolio. In my opinion, the stock represents a fairly good value while it remains in the low $50s.

Full Disclosure: I do not own WMT stock at the time of this writing, but it is on my stock watch list for possible purchase.
You can see my full list of individual holdings here.

Further reading:
Automatic Data Processing (ADP) Dividend Stock Analysis
Waste Management (WM) Dividend Stock Analysis
Pepsico (PEP) Dividend Stock Analysis
Exelon (EXC) Dividend Stock Analysis
8 Reasons to go with Dividends