Tags: walmart | dividend | recession | economy

Wal-Mart: A Dividend Aristocrat for the Next Recession

walmart corporate logo symbol in white and yellow on side of beige building

By Tuesday, 11 December 2018 09:22 AM Current | Bio | Archive

Volatility has returned to the stock market over the past several weeks, which could be a sign of upcoming economic trouble. If a recession hits the U.S., investors should resist the urge to sell out of stocks. Markets are very difficult to predict, and by selling stocks an investor loses the benefits of compounding dividends (along with potential taxes and trading costs).

Instead, investors anticipating a recession could allocate a portion of their portfolios to low beta stocks. A stock’s Beta value is one of the most widely-utilized measures of volatility. Investors can position themselves for a declining market by buying stocks with low Beta values, such as Walmart Inc. (WMT).

Walmart greatly outperformed the broader stock market during the Great Recession, thanks to its recession-resistant business model, and likely will again if another recession were to occur.

Business Overview

Walmart traces its roots back to 1945 when Sam Walton opened his first discount store. Since then, Walmart grew into the largest retailer in the world, serving 270 million customers each week. It generates annual revenue above $500 billion. Walmart has performed well in recent periods. Third-quarter earnings per share rose 8%, thanks to comparable sales growth of 3.4% in the core U.S. segment. Traffic was up 1.2% while average ticket size rose 2.2% in the U.S. last quarter.

The major driver of Walmart’s growth is its booming e-commerce business, which grew by 43% last quarter. Walmart has invested billions in e-commerce to compete with Amazon and others in the online retail space. Grocery pickup, a key strategic initiative for Wal-Mart, is now available at 2,100 locations and the company’s grocery delivery service is available at 600 locations, with more to come.

One of the most attractive aspects of Walmart’s business model is it not only grows during economic expansions, but also during recessions.

Recession Performance

Beta is a useful statistic when measuring a stock’s underlying volatility. Put simply, Beta represents how a stock price moves in comparison to the moves of the broader market. For example, if a stock has a Beta value of 1.0, the share price can be expected to increase 1% for every 1% increase in the S&P 500. If a stock has a Beta of 0.75, it should gain 0.75% for every 1% increase in the S&P 500. Alternatively, if a stock has a negative Beta value, for example -0.40, it will decline 0.4% for every 1% increase in the S&P 500.

Walmart has a Beta value of 0.35, which means the stock is expected to increase or decrease 0.35% for every corresponding 1% increase or decrease in the S&P 500. A Beta value between 0-1.0 means a stock is not likely to increase as much as the S&P 500, which can be a disadvantage during bull markets. However, it can be valuable protection against falling markets.

Walmart stock performed very well during the previous major market downturn, during the Great Recession of 2008-2009. In fact, Walmart was one of only two stocks in the Dow Jones Industrial Average (the other being McDonald’s) that increased in value during 2008. This was because of the resilience of the company’s underlying business model.

As a discount retailer, Walmart tends to bring in more shoppers when the economy loses momentum, since consumers increasingly hunt for low prices when times are tough. Walmart performed extremely well during the Great Recession. It actually grew earnings each year of the recession:

  • 2007 earnings-per-share of $3.16
  • 2008 earnings-per-share of $3.42 (8.2% increase)
  • 2009 earnings-per-share of $3.66 (7% increase)
  • 2010 earnings-per-share of $4.07 (11% increase)

Wal-Mart’s impressive performance during this time indicates the company might actually benefit from recessions.

Final Thoughts

Walmart’s stable business model has allowed it to reward shareholders with rising dividends. As a Dividend Aristocrat, Walmart has increased its dividend each year for more than 40 years in a row. This kind of streak is only possible with a business model that can thrive, no matter the economic climate.

Walmart stock has a reasonable valuation and a 2.2% dividend yield. Its solid yield and dividend growth will compensate investors during a bear market. And, the share price should also hold up relatively well in a recession, due to the consistency of the company’s earnings. As a result, Walmart is one of the best stocks to buy in a recession.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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Tuesday, 11 December 2018 09:22 AM
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