Dividend stock bargain #4: A retail giant getting no respect

The market’s run-up since the middle of last year has been no friend to bargain hunters, with most stocks now trading at or above full valuations. However, some high-quality “blue chip” dividend paying stocks have lagged and remain reasonably valued. One of the current standouts in this regard showing up in my valuation spreadsheet is Wal-Mart Stores [[WMT]]:

Wal-Mart is the world’s #1 retailer, operating more than 8,400 discount stores, wholesale clubs and combination discount/grocery stores. In addition to its operations in North America, the company has operations in Asia, Europe and South America, with its international division accounting for 25% of sales.

Positives include the company’s solid earnings and cash flow, strong operating history and dominant market share. Risks include weak economic conditions that could impact the company’s primary customers, bad publicity (“headline risk”), pricing pressures from competition, and currency exchange fluctuations.

Currently trading at about $52.50 and yielding 2.78%, the stock technically remains in an intermediate-term uptrend even after a recent sell-off from the $58 level. A sustained break below $51-$52 would change this picture to something more neutral/negative.

Valuation wise, WMT is trading at the low end of its calculated fair valuation estimates, which range from the low-to-mid $50s up to the high $60s. From a dividend perspective, the company has an excellent dividend growth record with 38 consecutive years of increased dividends – the latest being a substantial dividend increase announced earlier this month – and is included in Standard & Poor’s index of Dividend Aristocrats.

Some critics point at Wal-Mart’s stock chart and argue that WMT is a “value trap” since it hasn’t gone anywhere in 10 years. By the same logic these same market observers presumably would have loved the stock at a wildly overpriced $70 in 2000 after seeing it appreciate 1300% in the previous 10 years!

I currently have a bullish options position in WMT where I could be “put” the stock (for a net cost basis of just under $50) if it trades below $52.50 between now and when the option expires in September. I will look to sell another put option(s) on WMT on further weakness, and would also consider going long the stock outright at around $50 or below.

For some other recent takes on WMT see the following links:

From Forbes: Sales Are Soft But Wal-Mart Stock Should Be $65 Or Higher
From The Dividend Pig: Walmart Dividend Stock Analysis
From Seeking Alpha: Benjamin Graham’s Perspective on the Dow Jones
From Seeking Alpha: Wal-Mart: Good to Shareholders

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