Walmart stock price is not cheap: is this dividend king a buy now?

Walmart (NYSE: WMT) stock price is firing on all cylinders this year as it has risen by over 28% since January. It has outperformed the benchmark S&P 500 and Dow Jones indices and the closely followed SPDR Retail Trust (XRT), which has risen by 1.5%. Walmart has also beaten other retailers like Target, Costco, TJX, and Walgreens.

Walmart earnings ahead

Next week will be important for Walmart, the biggest retailer in the UK, as it is expected to publish its financial results on Thursday.

These results are expected to show that the company was doing well as sales jumped. Analysts expect the numbers to show that its revenues rose to over $168 billion in the second quarter, a big increase from what it made in $161 billion. 

Walmart’s earnings per share (EPS) are expected to come in at 64 cents, higher than the 56 cents it made in the same quarter last year. 

The stock will also react to the forward guidance. In all, analysts expect its revenue guidance for the third quarter to come in at $167.1 billion and its annual revenue for the year to be $676 billion. 

Walmart achieves this remarkable success because of its scale, with over 4,682 stores in the country. These stores are located close to its customers, making it a highly convenient company. 

At the same time, it usually sells its products at a lower price compared to other retailers, which has helped it gain more market share. 

Growth is continuing

Walmart has evolved into one of the best-performing American retailers, helped by its strong branch network, robust online sales, Walmart+, and its diversified business. 

As a result, its annual revenue has continued growing in the past few years, including during the Covid-19 pandemic. The revenue rose from over $523 billion to over $657 billion last year. 

Walmart is taking market share from many companies. For one, its investments in the pharmacy industry partially explain why companies like CVS Health and Walgreens Boots Alliance are struggling. 

Walmart also owns Sams Club, the biggest competitor to Costco. The division has over 47 million members who pay at least $50 for the basic plan and $110 for the plus membership. If all these members paid $50, then the company would make $2.3 billion a year. In the last quarter, Sam’s Club’s revenue stood at $21.4 billion 

Walmart has become a major e-commerce player in the US, generating the most sales than Amazon. In the last quarter, its global e-commerce sales rose by 21%, helped by its store pickup and delivery and marketplace revenue. 

Walmart has become a dividend king

Meanwhile, Walmart has finally become a dividend king now that it has successfully grown its dividend for 50 years. It has a room to grow these payouts because of its low payout ratio of 33.46%. A payout ratio is a figure that looks at the portion of the free cash flow that a company uses to pay its dividend. 

Most importantly, Walmart has been highly active in implementing share repurchases. Its outstanding shares dropped to about 8 billion, down from 8.4 billion in 2020. 

It repurchased shares worth $1.1 billion in the last quarter and has about $15.5 billion to go in the current authorization. Walmart has returned about $11.5 billion to shareholders in the last five quarters. 

Valuation concerns remain

The biggest concern among investors is that Walmart has become a highly overvalued company. It has a market cap of over $538 billion and estimated annual sales of more than $676 billion. 

In terms of revenues, then it is clear that the company is not overvalued. However, revenue tends to be almost meaningless since what matters are the profits and free cash flow (FCF). 

From revenues of $657 billion in 2023, Walmart netted $15 billion, meaning that its price-to-earnings ratio is 43. This is a significantly high valuation, even for a company like Walmart that is doing well. Its forward P/E ratio of 27 is higher than the S&P 500 average of 21 and the industry average of 19.

These numbers mean that Walmart is priced to perfection and it could retreat if it misses its earnings. On the positive side, Walmart’s valuation metrics are smaller than their five-year average.

Walmart stock price forecast

WMT chart by TradingView

The daily chart shows that the WMT stock price peaked at $71.26 in July and has now pulled back by over 5.2% to the current $67. It has moved below the lower side of the ascending channel shown in purple.

Also, the stock has moved slightly below the 50-day moving average while the Relative Strength Index (RSI) has moved below the neutral point. Therefore, the most likely scenario is where the stock retreats to $65 after earnings and then resumes the uptrend.