It's inspiring to hear Walmart's (WMT -0.34%) story. Founder Sam Walton opened the company's first discount store in Arkansas in the early 1960s. It's grown to become the world's largest retailer.
Shareholders have been rewarded with market-beating gains. Over the last five years, Walmart's shares have gained about 87%, versus 86% for the S&P 500.
But past success offers no guarantee about the future, of course. Can Walmart continue innovating and driving profitability that will continue rewarding shareholders? It's time to delve into the company's business to make that determination.
Image source: Getty Images.
Walmart's strong customer appeal
Walmart's business premise has been to keep costs low and push these savings to customers. While others may pursue the same goal, management has this mission ingrained into everything it does. Since everyone loves low prices, that always attracts shoppers.
It continues to grow sales and profitability. In the fiscal first quarter, which ended on April 30, adjusted revenue grew 5.8%, and adjusted operating income was 12.9% higher. These figures exclude certain items, such as foreign currency exchange fluctuations.
Management expects adjusted sales and operating income to grow at the high end or even exceed its previous expectation. Originally, it called for a 3% to 4% sales gain and 4% to 6% operating income increase. While this isn't rapid growth, it has been producing steady gains.
Continuing momentum?
Fortunately, management continues to invest to keep pace with intense retail competition. This includes technology spending that has pushed its omnichannel capabilities and allowed many U.S. stores to have pickup and same-day delivery. It also has a subscription service, Walmart+, that offers free delivery, discounted gas, and a more efficient checkout, among other benefits.
Management has attracted a higher-income customer lately, in addition to its core customers at the lower end. In fact, the company has had market share gains with the upper-income demographic for a couple of quarters. The question is whether Walmart can retain these customers.
Even higher-income households have been affected by higher prices. Management argues that Walmart's focus on convenience has been playing a role. Historically, its stores have attracted a wider consumer base during economically challenging times. With inflation coming down, time will tell if this can last. But it's comforting that Walmart can attract more shoppers during difficult days.
Dividend rewards
Investors looking for reliable and increasing dividends should find Walmart shares appealing. The board of directors has increased payouts every year since 1974. That makes it a Dividend King.
Earlier this year, Walmart raised the quarterly payment by a sharp 9%. That's the largest increase in more than a decade and a positive signal about management's confidence in the future.
Walmart's stock has a 1.3% dividend yield, in line with the S&P 500. Certainly, you can find higher-yielding stocks, but Walmart also offers capital appreciation potential given its growing profitability.
The decision
Walmart's shares sell at a premium to the overall market. The stock has a price-to-earnings (P/E) ratio of 35, compared to the S&P 500's 28.
The company's fast growth days are likely behind it. But it has a simple but effective business, and it remains a strong retailer rather than losing market share to the likes of Amazon.
It's tough to buy shares when the stock's had a big run-up. Walmart's share price has gained 31% in the past year, versus 25% for the S&P 500. Some of the profitability growth may prove fleeting if upper-income customers go back to shopping at higher-end stores.
I'd hold off on investing a large sum right now, given the valuation. But long-term investors can build up a position over time by using dollar-cost averaging. Investing a fixed amount at regular intervals will allow you to avoid timing the market, and you will eventually own a nice number of shares in this strong business.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.
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