Walmart Stock (NYSE:WMT): “Dividend King” status can offset earnings worries

Walmart stock (NYSE:WMT) has been going through a bit of a rough patch lately, with earnings concerns worrying investors. The company’s revenue growth has struggled to keep pace with the rate at which costs have increased. As a result, the company’s margins have shrunk and revenues have declined. Therefore, Walmart’s stock appears to have flipped on the expensive side, especially as there are no promising prospects for earnings growth in the foreseeable future.

That said, it’s not all doom and gloom for Walmart. The company has announced its 50th consecutive annual dividend increase, which is music to the ears of income-oriented investors. As dividend investors continue to collect shares, it’s possible that Walmart’s current valuation will remain high, causing the stock to continue trading flat.

Overall, I feel pretty neutral about Walmart stocks. While the recent dividend news is certainly exciting for some investors, the company’s lack of earnings growth potential makes me hesitant to strongly support it.

Lack of profit growth leads to concerns

Recently, Walmart faced a major hurdle in terms of earnings growth. While management’s efforts to navigate challenging market conditions are commendable, the company has struggled to keep up with the relentless escalation of labor and product costs.

It’s not that Walmart’s management has been incompetent. In fact, given the circumstances, I’d say they did a great job. Due to the need to provide higher wages to retain and satisfy workers in a tight labor market while keeping prices affordable for consumers, it has become increasingly difficult to make a profit. This was illustrated in the company’s fiscal Q4 and full-year results, which were mixed.

Sales growth is commendable…

In terms of turnover, the figures were strong. For the quarter, the company posted revenue of $164 billion, up 7.3% year-over-year or 7.9% in constant currency. Specifically, comparable store sales in the US increased by 8.2%, easily beating the consensus estimate of 6.9%. In fact, it’s worth noting that December was the biggest sales month in Walmart history in the US, indicating strong consumer purchasing power.

The company’s E-Commerce segment also experienced significant growth, with sales up 17% and the company continued to gain market share in online grocery sales. Sam’s Club also performed well, with comparable store sales growth of 12.2% or 22.6% over a two-year stack, with membership reaching a new all-time high.

….But growing expenses are difficult to control

Despite Walmart’s strong sales, controlling costs in the current market environment has been a real challenge. The two main drivers of higher costs are labor costs and more expensive product sourcing.

In terms of labor costs, workers’ wages averaged nearly $17.00 per hour in 2022, which is the result of five rounds of wage increases that began in 2015. Then, in January, Walmart announced another increase in its minimum wages as the company continues to struggle in a tight retail job market.

So the company’s average wages for employees will continue to rise this year, and given the labor-intensive nature of the business model, this could have a significant effect on Walmart’s earnings. For context, Walmart is the largest employer in the world, with 2.3 million employees. A company-wide wage increase can therefore have an immense effect on margins.

And then there’s inflation, which has declined in recent months but remains quite high historically. Walmart has strived to maintain low prices to attract foot traffic, and it has succeeded in that regard, as evidenced by its sales.

However, as the cost of goods has risen disproportionately compared to shelf prices, margins have softened. In fact, fourth quarter gross margins were 23.5%, the lowest for Walmart in 16 years, while EBITDA margins were 5.1%, the lowest in the past two decades (as far as data goes back).

Dividend enthusiasm to hold valuation

Walmart’s valuation seems pretty high given the lack of earnings growth. Particularly due to a decline in margins, as previously mentioned, full-year adjusted earnings per share came in at $6.29, down from last year’s $6.46. Consensus earnings per share estimates for FY 2024 point to a further decline to $6.15, implying that shares are currently trading at an expected P/E of 22.8. That’s a very rich multiple with interest rates rising and no visibility on when earnings growth will resume.

However, Walmart’s valuation is likely to be bolstered by income-oriented investors and funds, with the company achieving new stature in the space. Specifically, along with its Q4 results, Walmart announced its 50th consecutive annual increase, entering the elite class of Dividend Kings (companies with more than 50 years of consecutive dividend increases).

While the stock’s return at 1.7% may be very low in the interest rate landscape, the upcoming headlines about the company’s new dividend status should prompt dividend investors and related funds to continue collecting shares.

Is WMT Stock a Buy, According to Analysts?

As for Wall Street, Walmart has assigned a Strong Buy consensus score based on 21 Buys and four Holds in the past three months. At $162.79, WMT’s average price target implies upside potential of 15.7%.

The takeaway meals

In conclusion, Walmart’s recent sales growth has been remarkable. Still, the company’s struggle to contain rising costs and lack of earnings growth visibility make it difficult, in my opinion, to give a positive review.

However, Walmart’s new status as dividend king, with 50 consecutive annual dividend increases, may maintain its high rating among income-oriented investors and income-oriented funds.


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