Amazon.com Inc. (NASDAQ:AMZN) is the undisputed leader of the global e-commerce industry, and none of the other players in this space were able to compete with this company for market share in the last couple of decades.
One of the key pillars of its success has been Amazon Prime, a premium membership program that provides many benefits such as free same-day shipping, access to original video content on Prime Video, free access to Prime Music and 5% cash back for eligible purchases at Whole Foods Market. Amazon Prime comes at an annual fee of $119, or $12.99 if paid monthly. While some investors doubted whether consumers would embrace this product at first, more than 112 million Americans now have active subscriptions according to company filings, which goes on to indicate its popularity.
Walmart Inc. (NYSE:WMT), one of the nation’s leading grocery store chains that has been around for nearly six decades, has decided to compete with Amazon due to worries about the retailer encroaching on its grocery business. On July 7, Recode reported that the company will be launching Walmart+, a subscription-based product to compete with Amazon Prime, for an annual fee of $98.
Shares of Walmart popped 7% following this announcement as investors absorbed this positive development, and Walmart is set to reward investors handsomely in the long run, in my view.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The perks of Walmart+” data-reactid=”22″>The perks of Walmart+
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Same-day delivery for groceries is not the only benefit that would be enjoyed by members. Subscribers to this service will get discounts on fuel at Walmart gas stations and will have access to product deals earlier than non-members. Last September, the company introduced the concept of Delivery Unlimited, a $98-a-year plan that facilitates expedited delivery of groceries, and Walmart+ seems to be an expanded version of this idea.” data-reactid=”23″>Same-day delivery for groceries is not the only benefit that would be enjoyed by members. Subscribers to this service will get discounts on fuel at Walmart gas stations and will have access to product deals earlier than non-members. Last September, the company introduced the concept of Delivery Unlimited, a $98-a-year plan that facilitates expedited delivery of groceries, and Walmart+ seems to be an expanded version of this idea.
In a bid to compete with Amazon directly, Walmart is even planning to roll out a video content platform free of charge to its members as well.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="No immediate threat for Amazon” data-reactid=”25″>No immediate threat for Amazon
Amazon has a head start of over 15 years over Walmart, and it seems unlikely that a newcomer to this space will pose a serious challenge to the e-commerce giant. However, Walmart could still be a winner even without challenging Amazon, in my opinion, as the company has a solid reputation among discount shoppers and the low income households in the country.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="It’s not only about e-commerce for Walmart” data-reactid=”27″>It’s not only about e-commerce for Walmart
The renowned retailer is expanding its business horizons by diversifying into other lucrative business sectors, in particular the pharmaceutical industry. Providing communities with affordable health care services is one mission of the company.
The first Walmart Health store was opened in Georgia last September, and the company plans to aggressively open new stores as the current macro situation is favorable for this sector. The need for high-quality health care services has skyrocketed in the last few months, and Walmart is tapping into this newfound opportunity. On June 17, senior vice president of Walmart Health and Wellness Sean Slovenski wrote:
“With 90 percent of Americans living within 10 miles of a Walmart store, we believe we can help by bringing quality healthcare to the communities that need it most. We don’t take lightly the responsibility to serve our customers in this way, including through our $4 generic prescription program we launched more than a decade ago. It’s more important than ever, which is why we’re opening more Walmart Health locations, so we can help even more customers access the healthcare they need.”
With thousands of stores spread across all regions of the country, it seems obvious that Walmart would be able to funnel its supermarket traffic to its medical clinics in the future. The low-cost packages and services offered by these outlets, on the other hand, are likely to lead to customer stickiness as well.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Tapping into high-growth areas” data-reactid=”34″>Tapping into high-growth areas
Many companies in the United States have already identified the need for establishing their footprint in countries that are seeing above-average growth, such as India. In 2018, Walmart invested $16 billion for a 77% stake in Flipkart, the leading e-commerce platform in India. With this deal, the company was able to establish its roots in a country that is expected to become the second-largest economy in the world by 2050, according to the World Bank.
India is seeing a surge in the number of people with access to the internet as billion-dollar infrastructure development projects have been carried out by the government to help the country emerge as the top nation for companies domiciled in Europe and North America to outsource their business operations to. According to data from the World Bank, the internet penetration rate in the country has improved dramatically from just over 2% in 2006 to 37% in 2019. As more consumers embrace online shopping, Walmart will reap the rewards of its investment in Flipkart for many years.
In 2018, Walmart CEO Doug McMillion said:
“India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading the transformation of eCommerce in the market. As a company, we are transforming globally to meet and exceed the needs of customers and we look forward to working with Flipkart to grow in this critical market.”
Walmart is likely to expand into other countries as well, which would boost the earnings power permanently.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Walmart as a dividend growth stock” data-reactid=”46″>Walmart as a dividend growth stock
Income investors over the last few months have received several blows as a result of many companies that were thought to be financially strong deciding to cut back on shareholder distributions. Banks, on the other hand, are facing a rude awakening as policymakers are pressuring them to abandon share repurchases and cap dividend hikes in order to prepare for waves of loan defaults due to the economic recession. Amid this challenging outlook, it would prove to be difficult to identify companies that are on strong footing to honor their dividend commitment to shareholders.
Walmart is one company that investors can bank on to deliver the goods. The company has a history to be proud of, considering the 47-year streak of dividend hikes.
The management is strongly committed to protecting this reputation, which is a positive indication for investors. What is even more attractive is how Walmart has consistently covered dividends with free cash flow, ensuring safety from a payout perspective.
Source: GuruFocus
The expected bump to earnings resulting from Walmart’s expansions into e-commerce and health care can be reasonably expected to result in a boost to shareholder returns going by the company’s dividend history.
Often, investors end up on the losing side of it by investing in companies with high dividend yields but not-so-encouraging prospects. Walmart, on the other hand, trades at a yield of 1.75% on July 9 and is a company that is investing to secure sustainable earnings in the future. This makes the company a suitable investment for dividend investors.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Shares are not cheap” data-reactid=”60″>Shares are not cheap
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Value investors search for companies with solid numbers trading at low valuation levels. While the idea behind such a strategy seems appealing at first, it could lead to undesirable results in the long run. Warren Buffett (Trades, Portfolio) famously said, "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price."” data-reactid=”61″>Value investors search for companies with solid numbers trading at low valuation levels. While the idea behind such a strategy seems appealing at first, it could lead to undesirable results in the long run. Warren Buffett (Trades, Portfolio) famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Walmart is a wonderful company that has survived the onslaught from Amazon for more than a decade, all the while improving its numbers thanks to prudent management decisions such as embracing online shopping trends and investing to secure growth.
Walmart is trading at a price-earnings ratio of just over 23 in comparison to the sector median of 19. Over the last five years, shares have traded at an average earnings multiple of 25, which suggests the company is not overvalued, even though its peers are trading at more desirable valuation multiples.
The key here is that Walmart is an outperformer, which I believe warrants a premium over its competitors. Wall Street analysts have a median target price of $138 per share, which suggests the company is undervalued by 11%. In the long run, I think Walmart is likely to provide double-digit annualized returns as it gains traction in the e-commerce industry both inside and outside the United States.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Takeaway” data-reactid=”65″>Takeaway
Amazon has been an obvious winner of the pandemic crisis. Many Wall Street analysts expect the e-commerce industry to reap the rewards of this phenomenon for a long period as consumers who were unaccustomed to buying merchandise and groceries online are realizing the benefits and convenience attached to doing so.
Walmart, with its recent investments, is in a strong position to benefit from this trend as well. With diversified business operations and a competent management team, I anticipate that the company is set to outperform most of its peers for a prolonged time.
Disclosure: I do not own any shares mentioned in this article.
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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="This article first appeared on GuruFocus.
” data-reactid=”76″>This article first appeared on GuruFocus.
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