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And there’s no such thing as a one-size-fits-all stock.
A case in point is Walmart (WMT), one of the victims of what Jefferies analyst Steph Wissink referred to as “a wild 48 hours in retail.” After Walmart and Target (TGT) reported ugly quarters, investors obliterated $65 billion in market value between the duo in just two trading sessions.
And the “bad news” from the two leaders kicked the pins out from under the entire retailing sector — and we watched as other big names like Best Buy (BBY), Dollar General (DG), Dollar Tree (DLTR), and Costco (COST) endured their own market beatdowns.
But Walmart was a play that I’ve repeatedly described as a “forever stock.”
It’s my term for a company so strong and well-positioned that you could buy its shares, own them for the long haul, and sit back as they build your wealth.
I’m not a person who shies away from his statements. So when a colleague this week reminded me of my “forever stock” stance on a play that’s down about 22% so far this year — and asked if I still saw Walmart the same way — I didn’t hesitate to answer with a “yes.”
But there are different ways to think about it depending on what you want to accomplish.
Walmart is still a great business — one of the best in the world — but right now, it can be seen as three “different” stocks:
- Stock No.1: The Income Winner: For an income-seeker, grab it now — the stock is about to enter an elite club by becoming a “Dividend King.” Thanks to the stock-price drop, the yield has surged from 1.4% to more than 1.8% — and the yield on your original purchase price will keep growing as the payout increases.
- Stock No. 2: The Safety Play: For investors who like to play it safe — but who want to own great companies — keep watching and snag it when our tools tell you it has entered the Green Zone. We’ll know then that it’s in a confirmed uptrend.
- Stock No. 3: The Buy-And-Hold Play: If you already own it — because you understand as I do that Walmart is a true “forever stock” — just hold on. This company is fine and will keep building wealth over the long haul.
I back them up, too.
I’ve said several times here that Walmart is a “forever stock” because it’s a great business.
Let me prove it.
My Kingdom for a MoatTrading has its place in any type of market — including in the uncertainty-driven, whipsaw-pattern market era that we’ve clearly careened into. But if there’s one thing I’ve learned in my years as a tech entrepreneur and the CEO of TradeSmith, great fortunes are built on strong foundations.
And those strong foundations include “forever stocks” — the shares of companies that share common attributes, including:
- A dominant market position
- A protective “moat” — competitive advantages like an unassailable brand, a strongbox of patents or trade secrets, or a “tollbooth” position in the marketplace
- Hefty margins that mean every additional dollar of sales adds muscle to the bottom line
- Capital efficiency that ensures the company throws off a lot of free cash for investments in growth, stock buybacks, or dividend increases
- Predictable, long-term growth in its business, which translates into predictable, long-term growth in the company’s stock price
It’s special. Very special.
A Beast — as a Retailer and a Wealth CreatorFounded by Sam Walton in 1962 as a single store, Walmart has been dubbed “The Beast of Bentonville” because of its retailing dominance and its Bentonville, Arkansas, headquarters.
The nickname is well-earned: Exactly six decades after its founding, this company is a retailing gorilla with a chain of nearly 10,500 stores and 230 million customers served each week.
Shoppers aren’t the only folks who feel like Walmart delivers great bargains. Investors who grabbed shares in the company’s October 1970 initial public offering have watched as every single dollar they invested turned into more than $18,800, thanks to long-running share price growth and 11 stock splits that turned 100 shares into 204,800.
That’s the kind of stock-market math we like.
That’s the math of a “forever stock.”
Walton set it up for that kind of success. His business plan was simple: to offer quality merchandise at affordable prices. It’s an elegant trade-off strategy that accepted tighter profit margins in return for supercharged sales growth. And Walton did this by searching out the low-cost suppliers in every product category — meaning Walmart stores soon developed a reputation for undercutting the competition.
The results speak for themselves. Walmart sales zoomed 45% in the company’s first year of operation; in his first five years, Walton expanded to 18 stores.
And that business plan — which Walmart still follows today — fueled long-term growth.
By the late 1980s, Walmart was more profitable than its main rivals, Kmart and Sears Roebuck. By 1990, it was the largest U.S. retailer by revenue. Just a few years later, the company expanded into Mexico and Canada. And by 2000, there were Walmart stores in North America, South America, and Europe.
In community after community around America, local merchant groups were created to fight the Walmart incursion — to keep the “Beast of Bentonville” from vacuuming up customers from local shopping districts and bulldozing the mom-and-pop shops that had served those communities for decades.
But resistance was futile, as evidenced by a mid-1990s display of might that ended up as a Harvard Business Review case study. A company called Rubbermaid — known for the nifty soft-plastic storage bins that are stacked in millions of attics, basements, and closets across America — was on the ropes. Prices for resin, a key ingredient in plastic production, were skyrocketing, handing the company a loss of $250 million in 1995.
When Rubbermaid tried to pass those higher costs along to Walmart, which accounted for a full fifth of its sales, the retailer bit back hard. It booted Rubbermaid from the prime shelf spots, replacing it with a little-known company called Sterilite. With that one move, Walmart dethroned the market leader in storage bins and anointed a new category king.
Rubbermaid never really bounced back, and several years later was bought out by a company called Newell.
The takeaway was clear: The retailing game had changed, and Walmart had changed it. In the old days, product vendors were at the mercy of the manufacturers, who dictated everything from product features to prices to financing. But the “Beast of Bentonville” had become what’s known as the “channel commander” and now had all the power. With vendors like Rubbermaid, Walmart didn’t just dictate prices. It dictated what products those suppliers should make and even what processes they should use to make them.
Walmart’s ability to reshape the local retail landscape — and its ability to squeeze big suppliers into submission — has actually been given a formal name by economists, analysts, and business experts. It’s known as the “Walmart Effect,” and it has been the subject of careful academic research.
And the “Beast” just keeps adding muscle. In addition to its Sam’s Club warehouse chain, Walmart has expanded into groceries and e-commerce, while its 2.2 million employees in 2021 made it the largest private employer in the world.
Statistically, if you live in the United States, you almost certainly have a Walmart within 10 miles of your house.
But the growth isn’t over.
Primed for GrowthWalmart is one of the world’s top brand names. Despite its brick-and-mortar focus in an increasingly e-commerce world, the company continues to juice its sales and profit growth, and is now the No. 2 e-commerce company in America.
As part of that evolution, Walmart is becoming more of a “lifestyle” play — with a subscription service à la Amazon Prime.
Known as Walmart Plus, this $98-a-year ($12.95 a month) package gives members early access to sales promotions, deals, and game-console releases — not to mention discounts on fill-ups at partner gas stations.
NBC Select did a side-by-side comparison of Amazon Prime and Walmart Plus in September 2020 and found that the Walmart offering has some advantages over its rival. The analysis concluded that Walmart Plus is actually so good that consumers living near a Walmart store should consider subscribing to both.
Subscription services like this one are of interest to investors because they’re “annuity streams” that present the company with a predictable flow of cash.
When you combine all of these strengths, you end up with the forecastable growth that gives us a view of Walmart’s “forever stock” status.
It’s also about to be crowned as a true king.
Crowning a New KingThanks to the ongoing sell-off, Walmart’s shares have been slashed from a peak near $161 all the way down to about $122.
That’s okay — the stock will rebound.
But serious investors know there is value in more than just capital gains; dividends are equally essential.
And when it comes to those quarterly payouts, Walmart is part of an elite club.
The “Beast of Bentonville” is a member of an elite group of 65 stocks in the S&P 500 Index known as “Dividend Aristocrats.”
To be part of that auspicious group, certain parameters must be met. First, the company must be worth at least $3 billion for each quarterly index rebalance. Second, the average daily trading volume must be at least $5 million for the three-month period prior to the rebalance date.
Most important of all, the stock must have boosted its payouts for at least 25 straight years.
And Walmart’s dividend story is about to get a whole lot better — more exclusive, in fact.
With its increase in February — a 2% jump that takes its 2022 payout to $2.24 a share — Walmart has now boosted its dividend for 49 straight years. With an additional bump in 2023, the company will have increased its dividend 50 years in a row — a feat that will earn it a new title as a “Dividend King.”
That will vault Walmart into the realm of other giants including Coca-Cola Co. (KO) and Johnson & Johnson (JNJ).
What’s NextI’m going to let you in on a little secret — another facet of my “one-size-doesn’t-fit-all” thesis.
There’s not a one-size-fits-all explanation for share price declines.
Sometimes stocks drop because the underlying business has gone bad.
And sometimes they drop because the macro conditions have changed — transforming the once-undervalued stock into an overvalued security even though the underlying business really hasn’t changed.
That’s what we’re talking about with Walmart.
There’s nothing wrong with the retailer itself. But inflation has shifted the calculus of security valuation. And while the company’s sales are fine, inflation has increased Walmart’s cost of doing business, especially because soaring gas prices have raised its shipping costs.
Walmart CFO Brett Biggs just told Yahoo Finance that “we still feel great about the business model of the company … I feel good about the year … it’s that we’re dealing with some things that we haven’t dealt with before, and we’ll work our way through it.”
I second that. Walmart is too great a firm to flinch. It will cure whatever ails it.
In addition to high costs, Walmart is dealing with a blob of unsold goods because spooked consumers are shifting from luxuries to essentials. It may take a few quarters to work through those bloated inventories, but Walmart will pull it off. It’ll shift to those other products – and because of its market heft, it’ll be able to raise prices and pass higher costs on to consumers.
The bottom line: Walmart will be a long-term winner.
And while it may look like a different type of stock to others, I still see it as a “forever play.”
What other stocks do you think would pass the “forever play” criteria? Do you have some of them in your portfolio now? Let me know.