Wal-Mart Stores, Inc. (WMT), Costco Wholesale Corporation (COST): Is It Time to Buy Retail Stocks?

The company’s average dividend growth rate is a stellar 13.3%. For the three years from the start of 2010 to the end of 2012, the company has generated free cash flow of $5.2 billion. Out of this, about $1.2 billion has been used to payout dividends, about $1.8 billion to repurchase shares, and about $1 billion to acquire undervalued businesses. Fortunately, this capital allocation policy is supported by Costco Wholesale Corporation (NASDAQ:COST)’s strong balance sheet, which has a low debt to equity ratio of 11%.

At a respective 26x and 23.4x past and forward earnings, the stock is fairly expensive. The company is forecasted for a 13% annual EPS growth rate over the next 5 years. This is more than 250 bps greater than the rate that was achieved over the past 5 years. Accordingly, I believe there is fairly significant downside risk at current levels despite the low beta of 0.68.

Conclusion

Wal-Mart Stores, Inc. (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST) both have several major headwinds going forward. In my view, however, the world’s largest retailer only stands to gain more ground from further international expansion.

And, for good measure, I would like to close with a tribute to Target Corporation (NYSE:TGT) – my favorite retailer, whose founder recently died. Fortunately, you can also pay tribute to Target Corporation (NYSE:TGT) by buying shares! At 17.1x past earnings, Target Corporation (NYSE:TGT) is cheaper than its peers given the double-digit growth forecast. It has a decent FCF yield of 6.7% and is rated a “buy” on the Street. While Target Corporation (NYSE:TGT) has some international exposure, it is limited to North America. Given that Target Corporation (NYSE:TGT) is really just a higher-end version of Wal-Mart Stores, Inc. (NYSE:WMT), the upside is thus huge from a growth perspective.

The article Is It Time to Buy Retail Stocks? originally appeared on Fool.com and is written by David Gould.

David Gould has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale (NASDAQ:COST). The Motley Fool owns shares of Costco Wholesale. David is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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