Investors tore apart Wal-Mart Stores, Inc. (NYSE:WMT) stock over the last year, with shares shedding about 30% of their value in 2015.
But why the drastic fall in price for what is usually seen as a safe stock to hold? Revenue growth has come to a standstill for Walmart, rivals such Amazon.com, Inc. (NASDAQ:AMZN) keep growing and taking away market share, and Walmart recently told investors that it will forego some earnings to improve its e-commerce channel.
On top of that, Walmart is expected to report, albeit very small (-0.5%), its first year-over-year decline in revenue in at least 25 years. Even during the height of the financial crisis a few years ago, Walmart still managed to squeak positive revenue growth.
Yes, times might seem tough for Wal-Mart Stores, Inc.—and WMT stock might seem like a boring pick to own—but there is a lot for investors to like about a stock like this one. Let me explain…
Reason #1: Cheap Price
The stock market is currently valuing Walmart at about $210 billion, which is approximately 40% of the projected year’s sales of $500 billion. (Source: “The Good News Is, Walmart Stock Is Now Available At A Walmart Price,” Amigobulls, December 11, 2015.)
This is incredibly cheap, especially when you consider that the average price-to-sales ratio of all companies in the S&P 500 is 1.8. Walmart’s price-to-earnings ratio is about 14, which is the lowest it’s been in years and is well below the average of the S&P 500’s price-to-earnings ratio of 19.3.
WMT stock also has a 2.96% forward annual dividend yield at its current price. Walmart is considered a “dividend aristocrat,” having raised its annual dividend every year since paying its first dividend in 1974. Walmart should soon announce another dividend increase for the next year, so it can build on its reputation as being a reliable dividend stock.
Reason #2: E-Commerce
In the latest quarter, Walmart’s e-commerce segment grew at an anemic rate of 10% over the previous year and trails Amazon by a wide margin. However, Walmart is looking to accelerate that growth substantially.
In October, investors hammered WMT stock, as the company forecasted that profit would be lower next year on account of making investments in e-commerce, as it tries to become a formidable opponent to Amazon.
Since the announcement, Walmart has continued to roll out its free pickup service for online grocery orders to 140 stores in 25 different markets. This is a move to fend off rival Amazon, which offers “Fresh,” its grocery delivery service that is part of its “Amazon Prime” membership.
However, Amazon cannot offer customer pickups, unlike Walmart, which says that 70% of Americans live within five miles of its 4,500 U.S. stores. This is an important move for Walmart, as 56% of its U.S. sales came from food. (Source: “Walmart expands pick-up service as grocery war with Amazon intensifies,” Fortune, September 29, 2015.)
Walmart CEO Doug McMillon said last quarter that shoppers who order groceries online and pick them up in stores tend to spend 50% more than shoppers in-store. So you can see why Walmart is making substantial investments in its online business.
Additionally, Walmart introduced a mobile check-in service so that customers can alert store workers when they are ready to pick up an online order. This will help to build customer service and loyalty.
If Walmart can get its e-commerce business right, it also opens up a new market, as a high percentage of the population lives in urban centers where Walmart stores are not able to stake a claim due to their size and high cost of rent. Walmart’s investment plan into online has the potential to increase sales significantly.
Reason #3: Wal-Mart Pay
Walmart recently introduced “Walmart Pay,” which allows customers to check out using the Walmart mobile app. The app uses an e-payment option that should build customer loyalty. The hope is that by adopting Walmart Pay, the company can increase revenue by making the checkout process more time-efficient, increasing in-store traffic.
Walmart is trying to mimic the great success Starbucks Corporation (NASDAQ:SBUX) has had with its app. Starbucks’ mobile payment app now accounts for about 20% of all in-store U.S. transactions. (Source: “Walmart Takes a Page from Starbucks in Mobile Payments,” Fortune, December 10, 2015.)
The Bottom Line on WMT Stock
Walmart might be sacrificing short-term pain for long-term gain, but its investments into e-commerce and Walmart Pay should eventually reward WMT stock investors. With the stock taking a hit over the last year, driving it down to a cheap valuation, WMT might be worth a closer look.