Wal-Mart’s Gross and Net Margins
One of the attributes of retail stores is relatively high gross margins. However, net margins tend to be very thin. This is especially true of grocery stores, which is becoming a larger component of Wal-Mart’s business. What makes up for the low net margin is the consistency of the business due to the essential nature of the products that Wal-Mart provides its customers.
The following FUN graph plots Wal-Mart’s gross profit margin (gpm) and net profit margin (npm):
Wal-Mart’s Shares Buy-Backs
The following FUN graph plots Wal-Mart’s common shares outstanding (csho) since 1998. Clearly, in addition to a steadily-increasing dividend every year, Wal-Mart has also been rewarding shareholders with an aggressive share buy-back strategy. Buying back shares supports earnings growth, which ultimately rewards shareholders with more consistent and higher capital appreciation because in the long run earnings drive market price.
Summary & Conclusions
The Consumer Staples sector offers some of the highest quality blue-chip dividend growth stocks available to the retiree capable of providing both capital appreciation and an increasing dividend income stream. However, a side effect of the quality and consistency that many of the better names in this sector provide is that many of the best names are commonly premium priced. Because this premium pricing tends to persist is not necessarily dangerous relative to long-term losses. However, it does indicate taking a higher level of risk for a potentially lower rate of return than could be achieved with other companies in other sectors with similar fundamentals.
Whether or not to pay a premium for blue-chip Consumer Staples companies is a decision that each individual investor must make on their own. In my opinion, that’s okay, as long as those decisions are made with your eyes wide open. If you must own Colgate-Palmolive, Coca-Cola, etc., then you should be prepared to pay a premium.
On the other hand, if you are patient (I waited 14 years to buy Procter & Gamble on September 1, 2009) the opportunity to purchase blue-chip Consumer Staples at reasonable valuations may eventually occur. Then again, if you are willing to dig deep enough, you will more likely than not be able to purchase a great Consumer Staple at a sound valuation. The names on my conservative list represent examples today. But my current favorite is Wal-Mart, which I am currently conducting due diligence on pending purchase.
My next article will cover the Health Care Sector.
Disclosure: Long CL, CLX, GIS, UL, KMB, KO, PEP, PG, WAG, RAI, SYY at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
