Why An Investment In Walmart Is Dead Money

Back to school shopping season is almost upon us. Parents will be headed out to discount stores to save money on school supplies, backpacks, clothing, and shoes. College students will be heading back to college soon and buying books, electronics and dorm essentials. Despite the uncertain economy, parents plan on spending more money this year than in 2009. According to American Express, parents with two kids spend an average of $550 on back to school shopping. So, what retailers stand to benefit the most from the coming spending spree?

The biggest beneficiaries will be the usual suspects: Walmart (WMT), Target (TGT), Costco (COST). The best bargains will be found at the discount super stores. These stores sell any items that a kid from kindergarten to college are looking for including televisions, electronics, clothing, notebooks, pencils, paper, books, bedding, laptops, laptop stands, desks, and chairs. These big box retailers can use their pricing power as leverage to entice more shoppers. All of these companies should see an uptick in spending from the back to school boom.

The interesting part is that just because a company makes money does not mean it is great investment opportunity. Take Walmart for example. Walmart is the cheapest stock of the three trading at just under 13 times this year’s earnings and 11.6 times next year’s earnings. Although the retail giant is the largest in the country and generates more revenue and net income than Target and Costco combined; it has actually been the worst investment over the past 10 years. Look at the returns of the 3 retailers over the past decade.

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As you can clearly see, sometimes the best value is not always the best investment. Walmart has been dead money for the past decade. The stock is the only one of the 3 big retailers that has produced a negative return over the years. Are you thinking of buying it for the dividend? It’s not a great dividend performer either with the stock yielding just 1.7% over the past 5 years.

An investment in Walmart is like buying a low yielding investment grade bond. Your capital will be protected and there is some dividend income but the opportunity for capital appreciation is severely limited.

Disclosure: I do own shares of Costco.

Photo by: mjb84

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12 Responses to “Why An Investment In Walmart Is Dead Money”

  1. [...] This post was mentioned on Twitter by WakeUpWalmart, just me. just me said: RT @WakeUpWalmart: WMT's stock tells us they need you, towns and cities, more than you need them. You have leverage! http://ow.ly/2mTEH [...]

  2. avatar Carol Perzy says:

    ANYTHING…ANYTHING to discourage consummers from supporting the Economy-Distructive Walmart is necessary. Everyone needs to view” The High Cost of Cheap Pricing” A REAL eyeopener !!!

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  4. Hey, first time checking out your site after I saw your comment on my site. Love the niche focus here, great stuff. I guess to play devil’s advocate here, why would Buffett still hold WMT if it’s essentially dead money? Don’t get me wrong, I totally get that the stock essentially trades sideways in a channel. But if you’re pocketing the dividend or playing the swings you could certainly make it a profitable play.

    The big meme right now is “buy high quality stocks” and “buy dividend payers”. That’s certainly right up Walmart’s alley and despite it’s boring nature and sideways stock price action over the years, I wouldn’t be surprised to see many hedge funds adding shares here.

    Keep up the great work over here!

    Jay
    @marketfolly.com

    • avatar Mark says:

      Hi Jay,
      I wondered about Buffett buying the shares myself. The stock is not that cheap. He must see growth coming from overseas. I just think there are better opportunities for investors than Walmart right now.

      Thanks Jay!

  5. You might want to let Buffett in on the news since he is invested in Wal-Mart to the tune of about $2B, and another discount type of store overseas call Tesco. Whether Wal-Mart can continue to grow domestically and overseas only time will tell, but in my town they kick the butt of every other retailer.

    • avatar Mark says:

      I think investors can do better than investing in Walmart. Buffett himself said that if he did not have the encumberances of his large fortune that he could generate 50% returns. Walmart may be an undervalued large cap but there are much better opportunities in the market.

  6. Very well written and informative. Thanks alot.

  7. avatar JD says:

    I would like to offer a rebuttal to why I don’t think Walmart is dead money. Although Walmart’s stock price has not moved since 2000, it was because the stock price was priced way too high back in 2000. In fact, Walmart is probably a much better investment now than when it was back in 2000.

    If you were to compare the P/E ratios of Walmart, Costco and Target back in August 2000, you will find that Walmart was grossly overpriced, and Target was the most underpriced relative to its peers.

    P/E (approx. as of 8/2000):
    WMT = 40
    COST = 23
    TGT = 15

    Since Walmart is overpriced, it should have the lowest return, while Target should have the highest (relative to its peers). Your table above showing stock price returns over the past 10 years actually supports this idea.

    As of 8/2010, the valuation for Walmart has changed. Walmart’s EPS in the past 10 years has increased more than Costco and Target. Instead of a P/E of 40, Walmart now has a P/E of about 14.

    P/E (approx. as of 8/2010):
    WMT = 14
    COST = 20
    TGT = 15

    In turn, I would argue that Walmart is at least a better investment than Costco from today’s point of view.

    Thanks for a chance to share my two cents. I’ve enjoyed your blog for some time. Keep up the good work.

    JD

  8. avatar Mark says:

    JD Those companies also have better growth rates than Walmart. I don’t think any of the retailers are a bargain right now. I do own Costco but bought it way cheaper.

  9. avatar Ryan says:

    Thanks for sharing this information, Warren is certainly a great role model for today’s businessman.:)

  10. avatar Paul says:

    An alternative might be Tesco who are the worlds 3rd largest retailer and Warren Buffet also holds a stake in them. Not sure of the current yield after the market sell off but guess it must be approaching 5%.

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