At the start of a year that may turn out to be choppy, with the Fed on track to taper bond buying and the S&P 500 carrying a seven-quarter win streak, I'm looking for some foundational stocks with lower volatility risk.
Walmart (WMT) has defensive characteristics that can lead to decent returns after the stock has consolidated in a small range for the past 14 months.
The company's business momentum has remained strong, especially over the last two years. E-commerce has grown 87% since 2019, and Walmart and Sam Club's domestic same-store sales were up the previous quarter 9.2% and 13.9%, respectively. meanwhile, Walmart continues to invest in add-on businesses and in the buildout of its last-mile delivery strategy.
Last quarter, Walmart's earnings disappointed investors. While many retailers had seen expanding margins -- which raised expectations across the retail sector -- margins at Walmart missed the mark. The company restrained from raising prices as aggressively as the underlying inflation dictated, drawing a distinct balance between best serving customers and pleasing Wall Street.
Walmart will face a number of headwinds in consumer spending from the lapsing of stimulus benefits and the expiration of the child tax credit, which ended in December. However, expectations are already muted for the year. Wall Street is cautious about the low-end consumer in an inflationary environment and persistent margin pressure as Walmart holds the line on prices. Yet, an economy with strong demand for workers, rising wages, and low unemployment can offset some headwinds.
A few measures of consumer spending indicate Wall Street is underestimating revenue for the quarter. MasterCard Spending Pulse, which tracks both in-store and online purchases across all payment forms, jumped 8.5% for the holiday period compared to 2020. Another trend-tracking firm also noted strong sign-ups for Walmart+ leading up to Black Friday.
The current P/E of 22 is just below the market multiple. Steadily growing sales, a solid omnichannel strategy, and the addition of higher-margin business could help garner a premium multiple if they continue to execute. The dividend yield of 1.5% plus a significant buyback, likely to retire this year around 2% of outstanding shares, gives stability to the shares.
Guggenheim's Walmart analyst, Bob Drbul, has one of the highest price targets on Wall Street at $185. He sees traction in high-margin alternative revenue streams, such as advertising, and significant potential value creation in the company's Flipkart subsidiary. According to the CEO, the India-based online retailer, last valued at $37.6 billion, may IPO in the next 10 to 16 months. Walmart owns about a 75% stake in Flipkart.
The shares of Walmart have seen a steady amount of insider selling from the Walton family, amounting to $7.7 billion last year. At times, this has pressured the shares when sales are concentrated over a few days, as was the case in early December.
Walmart's stock is a reasonably valued stalwart where investors can be slowly rewarded. Management continues to invest in growth initiatives, including e-commerce and last-mile delivery. Aggressive pricing is helping to gain market share in grocery. With low expectations after a flat 2021, the shares may be set up to outperform this year.