Wal-Mart stock, WMT stockI wanted to start a new series of posts to show the reader the power of investing in dividend growth stocks.  About once a month I pick a company that would be considered a good investment for dividend growth investors and run a back test to determine what your results would be had you invested in the company 10 or 20 years earlier and held through today.  You might want to go back and read my results had you invested in Coca Cola stock which is the first company I looked at.  For this article I want to focus on another of my favorite dividend growth stocks to own, Wal-Mart.

A History of Wal-Mart

In 1962, Sam Walton opened his first Wal-Mart store ever.  Wal-Mart is a retailing giant selling all kinds of goods ranging from clothing, toys, auto parts, electronics, housing products and groceries.  Most people will recognize the store for their dedication to providing the lowest possible prices for their customers.  Over the past 50 years Wal-Mart has continued to grow and expand as they now operate in all 50 states as well as 26 countries around the world.  Wal-Mart is composed of their domestic U.S. stores, their international stores in countries such as Mexico and Japan, their online retailing operations and Sam’s Club stores which are warehouse clubs offering great deals.

Wal-Mart stock has been going strong for investors who have stuck with them over the long term.  For dividend growth investors, Wal-Mart has shown dedication of paying increasing dividends.  They have managed to pay out an increasing dividend every year for the past 38 years.  Earlier this month I did an analysis of Wal-Mart stock which you may want to check out if you are thinking of adding this company to your investing portfolio.

A 10 Year Investment in Wal-Mart

Let’s take a look and see how you would have fared if you invested $5,000 in Wal-Mart stock exactly 10 years ago.  On November 23, 2002 you would have been able to purchase roughly 93 shares of Wal-Mart for $4,999 at a closing price of $53.76.  The most recent closing price of WMT was November 23, 2012 when WMT closed at $70.20.  Today your 93 shares would be worth roughly $6,807.60 for a return of 36.2% or a compound annual growth rate of 2.7%.

While that may not sound like that great of a return, lets not forget about the dividends you would have received during those 10 years as well.  Over the course of the past 10 years you would have received a total of $838.58 in dividend income.  This means that your total return over the past decade of owning Wal-Mart stock has been 52.96% or 4.34% compounded annually.

So over the past decade while owning Wal-Mart shares you have enjoyed a 4.34% compounded annual return.  You have been paid in cash dividends $838.58.  You could have used that dividend income to help with some of your expenses such as groceries or utility bills.  Or you could have reinvested those dividend payments and your total return would have been even better.

A 20 Year Investment in Wal-Mart

A 10 year investment in Wal-Mart would have been alright but nothing spectacular.  How about a 20 years investment?  Lets take a look at how you would have fared had you invested $5,000 in Wal-Mart stock 20 years ago.  On November 23, 1992, WMT stock closed with a price of $62.38.  You would have been able to buy 80 shares for a total price of $4,990.40.  Since that date there have been two 2 for 1 stock splits.  Today you would have a total of 320 shares worth a total value of $22,464.  This would give you a return of 350% or 7.81% compounded annually.

Once again don’t forget about all the dividend income you would have received over the past 20 years by just owning your Wal-Mart shares.  Over the past 20 years you would have received a total of $3,398.08 in dividend income from Wal-Mart.  This means that your total return over the past 2 decades of owning Wal-Mart stock has been 418% or 8.57% compounded annually.

So a 20 year investment in Wal-Mart earned you a total return of 8.57% compounded annually.  You would have received $3,398.08 in dividend income to either offset your expenses or reinvest in the company.  Had you reinvested in more Wal-Mart stock your returns would have been even better.

Conclusion

While an investment in Wal-Mart may not seem like a home run with less than a 10% compounded annual return, you must look at it in context.  You have enjoyed a very nice return over 10 or 20 years while owning one of the most well established retail companies in the world.  This company has shown a commitment to paying increasing dividends over the past 38 years.  You can count on Wal-Mart to continue into the future leading the discount retail industry and returning profits to shareholders with dividend income.  I like Wal-Mart because I don’t see any way that people will not still be benefiting from their everyday low prices many many years into the future.

I want to point out that I am not taking into account the companies valuation 10 or 20 years ago.  I am merely looking at if you had purchased the stock 10 or 20 years ago.  If the company was overvalued at the time of your purchase, your returns will generally be low.  If the company was undervalued at the the time of your purchase, returns generally will do well.  Valuation at the time of purchase is one of the most important things to take into consideration.  Even a great investment will not turn out great if you pay too much for it.  I believe this is the reason for Wal-Mart’s lower returns over the past 10 years.  The valuation of Wal-Mart’s stock was way too high in the early 2000′s.  This is evident by the fact that the company stock has been fairly stagnant over the last decade even though they have been growing sales and profits like gangbusters.

What do you think?  Do you own Wal-Mart stock?  Would you have been happy with these returns over the past couple decades?  Where do you see this company going in the future?

Disclosure: I am long WMT.

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2 Responses to An Investment in Wal-Mart Stock

  1. I do own shares of WMT and I think it’s a great company. The yield is reasonable and the dividend growth is good. However, I think WMT is a bit expensive right now.

    In that sense, as you rightly mentioned in your post, when a stock is bought at high valuation, the future returns are likely to be on the low side. Though dividend investing is focused on dividend income, dividend stocks are not to be bought at any price.

    Have a great day!

    TDE

    • Dan Mac says:

      Thanks for your opinion Dividend Engineer! Earlier this month I did an analysis on WMT and determined that I believe it to be about fairly valued right now, certainly not undervalued but not too expensive currently either. I try to take valuation (my estimated valuation) into account with each of my purchases and at this moment would probably look for something a little better valued if I could find it to invest in.

      One thing that really irritates me is that when you mention WMT stock you always hear the argument that it has been flat the past decade. Well that is because in the early 2000′s WMT had a ridiculous high valuation compared to fundamentals such as earnings. Over the decade earnings have caught up to market valuation and I believe going forward shareholders should see some decent returns.

      Thanks for stopping by!

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