Walmart’s Stock Record
Jeff sent me this link:
Wal-Mart’s Ten Year Record: A Case Study of the Dangers of Overpaying for Growth
Wal-Mart Stores is one of the most successful growth stories in American history and can boast of an unparalleled track record of growth in nearly any measure one can think of. Whether your preferred metric is the number of square footage of retail space, sales, earnings, or dividend growth, a quick look at Wal-Mart quickly reveals an impressive trajectory that few others in retail can hope to match. However, as one looks at the statistics over the past ten years, it is clear that one measure has stagnated: Wal-Mart’s stock price. How could this be the case given Wal-Mart’s success over the past decade?
The author goes on to cite lots of details and offers the usual arguments about growth stocks not being able to maintain the same rate of increase the bigger they get. This is all true and should be of concern to outside investors (and those participating in Walmart’s employee stock plan), but he misses the point.
The Walton family, which owns about 40% of the stock, doesn’t really care about the price. They get their income from dividends and manage the company so that these do increase over time.
Much of the criticism of the banks has been over the misalignment of the interests of management, who made money from pumping the stock price, and those who lent money to the firms. The same is true of Walmart, except the situation is reversed. They have no interest in pumping up the stock price since they are not selling, but do have an interest in pushing up net profit usable for dividends.
Anyone who invests in Walmart stock without realizing the dynamics involved is a sucker.
My main point in the article was that investors must always be aware of the price level at which they are making a purchase and the implications that price level has regarding the rate of growth for the company going forward. When you have an already huge enterprise selling at high multiples implying very high growth expectations, that is a major warning sign that requires examination prior to making any purchase commitment. To do otherwise is to invite the kind of miserable returns realized by WMT shareholders over the past decade. None of this is to say that WMT isn’t a great company (it is) or that the BUSINESS results over the last decade were excellent (they were). However, the investment results of any individual shareholder ultimately depend on the price you pay vs. the value you get. WMT at 70+ in 1999 was a terrible investment even though the business did well.
Robert, we disagree on a lot, but at least you “get” how the company is run. Many in Bentonville do not even seem to grasp this.
Someone:
Doesn’t these mean that those employees who participate in the stock program are getting a raw deal?
This is what happened with many other firm’s plans which forced employees to over invest in the company’s stock. Even the Wall Street bankers have seen their stock options go up in smoke.
The basic principle of investing is to diversify. I think there are new pension plan rules which prohibit company plans from keeping too much of the defined benefit funds in the company’s shares.
Why would you want to work for a firm where the business plan is to favor the owners at the expense of the workers, suppliers and customers?
Walmart is actually under investing these days. It is just replicating its model in more stores and trying to duplicate it in countries where it may not be appropriate. The last big technological innovation was computerizing the supply chain and that is decades old now. Tweaks around the edges like RFID tags don’t make much of a difference. The push for energy efficiency is widely seen as greenwashing and won’t yield much in the way of actual savings.
Big box retail is last century’s model, Walmart is becoming a dinosaur. Draining out profits in the form of dividends is usually the sign of the second and third generation getting ready to sell off and leave.
I don’t know many people who seriously use the stock purchase plan. Most who do use it to collect the 15% company match and sell it off when they need or want the money. If you can collect enough, I guess you can sit back and enjoy the dividend, but good luck.
Wal-Mart’s retirement plans were formerly invested in Wal-Mart stock by default, but now there are other plan options and I don’t believe that Wal-Mart stock is an option for anything except for profit sharing funds. (Need to check; I have mine invested in the moderate plans, but this is just the company contribution. I use a Roth IRA for the money I personally am socking away.) I believe you are correct about the law on this matter.
Stock options are largely worthless to the point that they are no longer granted to management at my level (only big wigs). However, the company does grant shares of stock that vest over a period of years. As far as I know, most people sell them when they mature.
I won’t comment on the company’s growth plans.
I’m not sure what the Waltons’ plans are. It is increasingly difficult to maintain the lion’s share of the company’s stock in the hands of one family with each new generation. It appears that Rob Walton’s son in law (recently named to the board) is being groomed to succeed him as chairman. Management has shifted; few remain who worked side by side with Sam Walton. Our new CEO never worked for the company while Sam was alive.
Is Big Box retailing a thing of the past; I’m not so sure. Maybe, maybe not. I am frustrated by our failures to dominate the online landscape and prove successful in new markets. I really like Doug McMillon in International, so hopefully he can turn it around there.
I do believe the next big innovation is on its way.
Walmart’s move into groceries is, I think, an acknowledgment that the traditional offerings of big box, and department stores, is no longer a growth area.
Bricks and mortar can no longer compete with low overhead online warehouse operations like Amazon.
Food is one of the areas where consumers will continue to show up in person – and frequently. But it is a low margin business.
Food markets have no need to be as big as Walmart, in fact huge size is counterproductive, it requires too much of a constant receiving operation of perishable foods. People also are unwilling to travel as far for food which they buy regularly than for household items which they buy only occasionally.
I’m sure I’m atypical, since I don’t buy much and am retired without any small kids to clothe and buy things for, but about the only thing I buy in person are shoes. My wife tried to buy a pair of her favorite brand last year and the local stores didn’t have it, provided poor service and were overpriced, so she even bought shoes online.
Over the past six months I’ve bought batteries, vitamins, a computer and even a kitchen trash can online. Perhaps not the most efficient for small items, but $2-5 for shipping was offset by the lack of tax and travel expense.
I don’t know what things will look like in the future, in the past Sears and fellow mail order operations had catalog stores in small towns so you could look and touch and ask questions, but they carried no (or little) stock. Maybe we’ll go back to something like that.
Given the way the stock has been trading through the recession, I’d happily have my retirement funds in WMT instead of my current 401k. This is not a raw deal compared to the guys buying into the LEH or BAC or C stock purchase programs over the last few years.
http://www.marketnewsvideo.com/?id=200905WMT051409&ticker=WMT&mv=1&start=&rpp=