With the recent dip in the price for Walmart, I began to run it through my screen:

- Yield over Avg Yield > 1.10
- Yield > 2.5% (but less than 7%)
- Payout Ratio < 0.8
- Chowder > 10

In general my basic strategy is:

Good quality + high yield + high growth (+ time & patience)

This strategy follows the same framework as the SBI book.

**Wal-Mart (WMT)**

__Summary of Criteria__WMT May 2015 | Area | Criteria | CheckList | Comment |

Quality Company
| Dividend Growth | >5 years | Yes | 42 years |

ROE/EPS/Op Margin | Stable | Yes | See Chart | |

Long term Avg Growth | Stable | Yes | Yes - but note the 10 Yr avg decline | |

FCF over Dividends | Yes | Yes | See Chart | |

M* Moat | Wide Moat | Yes | M* Wide | |

M* & S&P Credit Rating | > BBB+ | Yes | M* AA | |

Cash to Debt & Interest Coverage, Debt to Equity | Cash Debt >1 or Interest Coverage > 5 | Yes | Cash to Debt 0.2, Interest Coverage 11 Debt to Equity 60% | |

M* & S&P Stars | > 3 Stars for both | Yes | M* 4 Stars S&P CapIQ 4 Stars A+ Quality | |

Payout Ratio | <60% | Yes | 38% | |

Dividend Growth
& Yield | Dividend Yield | >3% | No | 2.5 |

Dividend Growth | >5% | Yes | 5Y CAGR 12.9 | |

Chowder | >12% | Yes | 15.40% | |

Valuation
| Yield/Avg Yield | >1.1 | No | 1.09 |

Dividend Yield Theory Mid Point | Below Mid Point | Yes | Mid Point 98; Low Point 65 | |

DRRM | ~10% | Yes | Assuming 6% growth; projected return=10.6% | |

M* Estimate | <M* est | Yes | M* 83 | |

S&P Estimate | < S&P cap IQ est | Yes | S&P Cap IQ 92 |

Data from M*, gurufocus, yahoo finance, S&P CapitalIQ, David Fish CCC list

__Quality analysis__**Years of Dividend raises**

WMT has 42 years of dividend raises. This is a good indication of continued dividends and dividend increases.

**Stability of key metrics**

These ratios provide an indication of how wide the moat is. I am looking for overall stability (or even better - growth). If the ratios decline year over year, then this is an indication of moat reduction. I also compare these ratios with other companies within the same sectors.

As you can see, WMT is very stable in these ratios which indicates that Walmart's Moat is still very much intact.

**Average growth**

The 10 year average trendline is around 6% (Revenue) - 9% (EPS).

However, looking at the avg growth for 10 & 3yrs average growth paint a different picture. It is clear that Wal-Mart is not the same as Walmart from ten years ago.

However, looking at the avg growth for 10 & 3yrs average growth paint a different picture. It is clear that Wal-Mart is not the same as Walmart from ten years ago.

**Free cash flow over dividends**

I use the free cash flow per share and compare this with dividends per share. FCF should cover the dividends. As you can see WMT's FCF easily covers the dividend YoY. The dividend should be very safe for many years.

**M* Moat**

I simply use the moat indicator from M*to validate my findings. M* indicates that WMT has a wide moat.

Being the largest retailer has its cost advantages while you can impose your will over the vendors. As indicated by ROE & Margin, I do not expect this to change soon.**Credit rating**

Here, I look for companies with credit rating of BBB+. Just like banks wanting good credit from you when you apply for a loan, you want companies which are stable from a credit perspective.

WMT's credit rating from M* is AA.

**Debt**

I look at the debt to equity ratio (<50) and cash to debt (<1) and interest coverage (>5).

Sometimes, a little good debt is good for a business. But too much debt can bring it down.

Sometimes, a little good debt is good for a business. But too much debt can bring it down.

WMT Cash to Debt 0.2 and it's Interest Coverage is 11 - which means it is financially safe. The Debt to Equity is around 60% which is higher than my 50% threshold.

**M* and S&P capital IQ rating**

I am looking for 3 stars and above from either. A four star is a bonus.

M* gives WMT 4 Stars and S&P CapIQ gives 4 Stars with A+ quality company

I am seeing that if the combined M* & S&P Capital IQ stars is 7 or more, then this usually is a good indication to buy (if the company has good fundamentals).

WMT combined stars is 8 - which means it is a good indication to buy.

__Dividend Yield and growth__
Dividend yield is 2.5% which is below my threshold of 3%.

5Y CAGR 12.9% which is above my threshold of 5%

The average YoY dividend growth is not great in the last couple of years 2014-2015 with ~2%.

WMT's Chowder is 15.4% - which is over the threshold, but the dividend growth in the near term is a concern.

__Payout Ratio__

__Value analysis__**Average yield**

The current yield per average yield for 5 years ratio is 1.09. I use this as a quick indicator for fair valuation (if greater than 1.1). Normally, my screen would miss this.

**Dividend yield theory mid point**

Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price.

Note: You can get the spreadsheet at: http://div4son.blogspot.com/2015/03/dividend-yield-theory-spreadsheet.html

Note: You can get the spreadsheet at: http://div4son.blogspot.com/2015/03/dividend-yield-theory-spreadsheet.html

Based on the price/yield chart, I estimate the high/low yields to be 3.0% and 1.5% respectively.

High Price: | 130.88 |

Mid Price: | 98.16 |

Low Price: | 65.44 |

I am okay to buy great companies at reasonable prices and I think the price lower than 80 is reasonable for WMT. It is much better to buy in the low 70s.

**Dividend Drill Return Model**

Also, using the dividend play book DDRM model per the Dividend Playbook, I try to estimate the total return. Using the growth information from above, I used a conservative growth rate of 6%.

DDRM | |

Dividend Rate ($) | 1.88 |

Divided by: share price | 78.53 |

Current yield (%) | 2.40 |

Core Growth Estimate (%) | 6.00 |

Divided by: ROE (%) | 21.11 |

Multiplied by: EPS ($) | 5.05 |

Cost of Growth (%) | 1.44 |

Earnings per Share ($) | 5.05 |

Minus: Dividend | 1.88 |

Minus: Cost of Growth | 1.44 |

Funding Gap ($) | 1.73 |

Divided by: Share Price ($) | 78.53 |

Share Change (%) | 2.20 |

Core Growth (%) | 6.00 |

Plus: Share Change (%) | 2.20 |

Total Dividend Growth (%) | 8.20 |

Plus: Dividend Yield (%) | 2.40 |

Projected Total Return (%) | 10.60 |

I estimate the projected return to be around 10.6%. I am happy with anything over 10%.

Rearranging the numbers using calculated div growth%:

Rearranging the numbers using calculated div growth%:

Dividend Rate ($) | 1.88 |

Required Return (%) | 10.00 |

Growth (%) | 8.20 |

Price | 104.88 |

So, the price range is slightly around my mid price point.

**M* and S&P valuations**

Morningstar gives WMT a fair value of 83. S&P capIQ gives a fair value if 92. Therefore, with a current price around 78, WMT is reasonably priced.

**Risks**

- Walmart is facing slowing growth as shown in the declining 10 yr growth averages.
- International stores are not doing well. They need this to provide future growth.
- The Ecommerce platform is affecting sales at the brick and mortar stores.
- Lower prices mean constant pressure on their margins.

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I think Walmart is an excellent company but it is having some difficult problems with growth. This is reflected in the reduced EPS and revenue 10 year average growth as well as the small dividend increases. Since I don't have any positions in Walmart, I am willing to add a small position - knowing that growth will be stagnant in the near term. Future positions will be considered only if their is a major dip or if Walmart improves on the growth aspects.

Recently, I added 22 shares in Walmart at $78. This will add around $43 to my estimated forward dividends.

That's it for now. Please let me know what you think of WMT.

Div4son

Disclosure Long WMT

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Thanks for the analysis. I'm also looking to add WMT to my portfolio. I have an order in at $75 - hoping to get lucky...

ReplyDeleteDividend Empire, thanks for visiting. I am glad my analysis is useful for you. $75 is a good price for WMT. Happy investing!

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