12 Jun Walmart (WMT)
As the US finds itself in the midst of a recession, and with a looming second wave of coronavirus cases set to sweep through the country as states reopen prematurely, it is difficult to pick stocks for your portfolio that you know will stand up to the pressure. However, it has only been a decade or so ago that the country went through the so-called “Great Recession” and we don’t need to look too far back to see how companies performed in such times of stress. Our focus today, Walmart, managed to stand above all others during that period and its why we think it’s the perfect recession-proof stock to be held in your portfolios today.
In 2008 consumers were feeling the financial pinch and turned to high-value retailers to save some cash. Despite the recession, Walmart actually managed to increase revenue by more than 7% and raise its dividend by 8%. The share price was up 20% for the year while the market was down 40%. Even during the early months of Covid19, we saw Walmart outperform. At its lowest point, WMT was down only 10% where the S&P500 had dropped more than 40%. I wouldn’t call it recession-proof – but it’s certainly the next best thing. However, we don’t just own this stock because it works well during a recession. We also like the potential it has to use its size to take over different markets going forward.
Walmart is an American institution. It is the world’s largest private-sector employee with approximately 2.2 million employees at over 11,500 locations around the globe. Mostly known for its sprawling megastores, or “hypermarkets” as they prefer to call them, they have risen to be the world’s largest retailer, with higher sales than any other company in existence. However as the times change so must companies adapt, and under mounting pressure from e-commerce competition, i.e. Amazon, Walmart have been busy modernising their business to appeal to today’s online consumer.
A strong online presence is the obvious goal, and internet sales for WMT have continued to get stronger each quarter. A task that is made much easier when you can capitalise on the biggest customer base in the world. E-commerce sales were up 37% in fiscal 2020. They’ve instigated free 2-day shipping, organised collection centres, and made strategic acquisitions such as jet.com and Flipkart to enhance the online user experience. But not only have they increased their online presence, they have also set out to make the instore experience a better one. Instead of focusing on opening new stores, they now have faster checkouts, improved diversity and quality of products, and workers that are better paid.
The grocery business is where Walmart truly dominate, and it accounts for half of all revenue (approximately 56% at last count). It is believed that $1 in every $5 spent on groceries in the United States goes to Walmart. It’s an astonishing number and one that they are working hard to protect. The sheer size of the operation gives them massive advantages in economies of scale and negotiating power with suppliers, and allows them to offer cheaper prices to consumers. Their improving online presence and delivery options are only going to enhance this product offering and has been a saviour during the pandemic where people have been afraid to visit bricks and mortar locations.
We have seen it so many times before. If you have a massive user base you can start selling them just about anything you want. Pharmaceuticals, food and alcohol, fuel, tobacco and pot, you name it – if you have people to sell to you can move in on just about any industry. And Walmart has more people to sell to than anyone else. It’s why they are in a ding dong battle with Amazon to get into people’s homes. We think Amazon is a must-have in our portfolio, why wouldn’t we want to hold the company who is going to take the most money off of them. Currently, Walmart’s revenue is twice the size of Amazon’s – $524 billion in fiscal 2020.
The best part is they come with huge potential but without the Amazon valuation. A p/e in the low twenties makes this stock defensive and safe – despite the strong growth. They throw out a dividend that has increased every year since the mid-1970s and have promised to spend $20 billion in share repurchases over the next few years. Why wouldn’t you when the share price is so cheap. This is why we think Walmart is a great stock to hold in the portfolio over the next decade or so.