Thursday, May 5, 2011
Linked here is a detailed quantitative analysis of Wal-Mart Stores, Inc.. (WMT). Below are some highlights from the above linked analysis:
Company Description: Wal-Mart Stores, Inc. is the largest retailer in North America and operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets.
Dair value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
WMT is trading at a discount to 1.) and 2.) above. The stock is trading at a 24.3% discount to its calculated fair value of $70.69. WMT earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
WMT earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. WMT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 37 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
WMT earned a Star in this section for its NPV MMA Diff. of the $3,195. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WMT has. If WMT grows its dividend at 13.3% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. WMT earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.
Memberships and Peers: WMT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Costco Wholesale Corporation (COST) with a 1.1% yield, Target Corp. (TGT) with a 2.0% yield and PriceSmart Inc. (PSMT) with a 1.6% yield.
Conclusion: WMT earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks WMT as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $100.04 before WMT's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 37 years of consecutive dividend increases. At that price the stock would yield 1.46%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 7.5%. This dividend growth rate is well below the 13.3% used in this analysis, thus providing margin of safety. WMT has a risk rating of 1.50 which classifies it as a Low risk stock.
WMT enjoys dominant positions in most markets where it competes. The company continues to gain market share aided by a slow economic recovery that continues to see consumers choosing WMT over higher-cost competitors. Its unmatched scale leads to favorable terms on everything from the products it sells to store leases and distribution agreements. I plan to continue adding to my position as my allocation allows and while the stock is trading below my fair value price of $70.69.
Posted by Marian at 5/05/2011 01:59:00 PM