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Top Picks 2016: Conservative Investors Pick Wal-Mart Stores

01/20/2016 7:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

Our Top Pick for conservative investors in 2016 serves nearly 260 million customers in over 11,000 stores under 72 banners in 27 countries and e-commerce Web sites in 11 countries each week, notes Kelley Wright, editor of IQ Trends.

As the largest non-government employer in the US and largest global hyper-market, Wal-Mart Stores (WMT) needs little introduction. Its size gives WMT a huge competitive buying advantage with its vendors and with its pricing to customers.

WMT's sales are huge, in fact, no competitor even comes close; even Amazon (AMZN). Still, Amazon is the darling because their sales are growing at a much faster clip.

WMT's major challenge is how to achieve sales growth without sacrificing its profit margins, something that arguably the company has been struggling with.

What is attractive about WMT is its balance sheet and substantial discount from its historically repetitive area of Undervalue. The debt ratios are healthy, WMT could pay off its debt and still have 1 2/3 years operating profit.

The company consistently generates free cash flow and its payout percentage of dividends is a modest 42% of GAAP earnings and 39% of free cash flow. This leaves room for future dividend growth.

Historically, WMT represents good value at a dividend yield of 2.50%. Based on the current dividend of $1.96, that equates to a share price of $78.

Trading recently around $62 per share, the current dividend is close to 3.20%. If the stock can simply return to the historically repetitive area of good value, then that would be around a 27% gain.

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