DEAR MR. BERKO: I invested $10,000 and bought 130 shares of Wal-Mart at $74 two years ago on a recommendation from a friend of mine who is an economist with the United Nations. The stock market has done really well, but my Wal-Mart investment hasn’t moved. It seems I made a bad choice. Wal-Mart stock is hardly higher than my purchase price, and other issues have increased more than 50 percent in the past two years. What’s wrong with it? Should I sell? My friend says Wal-Mart is being held down by the government’s demand for higher wages. – VT, Wilmington, N.C.
DEAR VT: The U.N. is a cesspool of political freeloaders who are there to butter their own nests. And I suspect your friend’s skill level as an economist precludes his employment by a legitimate entity.
In 2004, Wal-Mart (WMT-$76) traded in the low $60s, generated $220 billion in revenues, earned $1.50 a share and paid a 30-cent dividend. Since then, revenues have more than doubled, to $480 billion, and share income has more than tripled, to $5.15. And as WMT’s share price has grown at a compounded rate of 2.3 percent, the Dow Jones industrial average has doubled, to 17,000. When most companies reach a certain revenue size, share values usually hit a wall for a decade or longer, and their boards react by implementing attractive dividend policies. Between 2002 and 2011, WMT traded between $40 and $64. WMT was perceived as too huge to be flexible, too massive to maintain momentum and too sizable to innovate, though revenues continued to grow. However, WMT’s 30-cent dividend in 2002 zoomed to $1.92 this year, an impressive sixfold increase. Though the share performance has been stuffy, its dividend and earnings growth deserve five platinum stars.
Most observers believe that a $1-an-hour wage increase is unlikely and would be ruinous. And here’s why. WMT has 2.3 million employees, and 1.3 million could have their wages boosted by $1 an hour. Keeping the math simple and assuming a 40-hour workweek, that would increase WMT’s labor costs by $50 million a week. So a $1-an-hour wage hike would increase WMT’s costs by $2.5 billion next year, which would be 15 percent of this year’s $167 billion net income. And with net profit margins of 3.5 percent, WMT would need an additional $73 billion in revenues to cover that increase. No matter how you stuff the goose, it ain’t chopped liver. But it’s unlikely to happen.
However, WMT could be a superb investment because this $470 billion-revenue empire still has power in its fist. Its smaller neighborhood store format (management will open 270 this year) may eventually generate 25 percent of WMT’s retail revenues. Those stores are a big hit and popular among customers who replenish their pantries frequently. And WMT’s online revenue growth is impressive, growing 31 percent last year. Customers say the site makes it simple to shop and easy to check out. Though e-commerce is only 2 percent of revenues, during the next decade, some believe e-commerce could generate 20 percent of revenues.
And WMT is entering the banking business with a nationwide rollout of GoBank, a checking account linked to a MasterCard debit card and offering other prominent features. GoBank won’t charge overdraft fees or minimum balance fees or monthly fees, providing you have a minimum monthly qualifying deposit of $500. WMT’s GoBank will certainly challenge the “good old boy” banking system and knock those grabby-greedy banksters on their bums. Last year, Wells Fargo, Bank of America, Fifth Third Bank and the like collected $31.6 billion in overdraft fees. And Fifth Third’s banksters really stabbed customers in the back with an exuberant $37 overdraft charge, though it permits customers to have 10 overdrafts a day. GoBank will eliminate these and other “rape” fees with which banksters bleed depositors to increase earnings. Some banksters are getting nervous because, by hook or ladder, they know that WMT will change the way America banks and borrows, which will threaten their jobs.
Hold your WMT, and reinvest the dividends. In the coming dozen years, revenues may double, and earnings could triple. And the dividend could grow fourfold, to $7.68, or a 10 percent yield on your basis. But I haven’t the slightest idea what the share price will be.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.