Buffett, Other Smart Investors, Buying Wal-Mart
On the same day that Wal-Mart (WMT) ratcheted down its year-end earnings target, along came news that Berkshire Hathaway (BRK.B) had once again added to its Wal-Mart stake during the second quarter. Granted, Berkshire wasn’t jumping in with a two-fisted grab; the addition was basically to keep the lagging Wal-Mart stock at about 4% of the $107.5 billion investment portfolio.
While Warren Buffett’s big four holdings -- Wells Fargo (WFC), Coca-Cola (KO), American Express (AXP) and IBM (IBM) -- account for more than 60% of the portfolio, Wal-Mart is in fact the fifth largest position in the portfolio. The fact that Buffett still clearly wants to maintain its 4% weight is not for nothing. (Among the Big Four, only IBM was added to in the second quarter. In late June, YCharts chief of research Erik Kobayashi-Solomon took a detailed look at IBM stock and concluded that around $240 a share represented a median outlook for fair value. That’s a near 30% premium to where IBM recently traded. Remember, too, Bank of America (BAC), when Buffett converts those BofA preferred shares he bought during the financial crisis, will join the Big Four as a Big Fifth of common stock holdings.)
Interestingly some other pretty impressive value investors were also adding to their Wal-Mart stakes in the second quarter. Multiple Dodge & Cox funds along with Oakmark and Vanguard Wellington added to their positions. Wal-Mart, a wide moat stock in the eyes of Morningstar (MORN), currently trades at a near 8% discount to the research firm’s estimate of fair value. Not a huge margin of safety, but a slight relative value when held up against all wide moat stocks and the consumer defensive sector, both of which trade at fair value. (Full disclosure: Morningstar is an investor in YCharts.)
That slight discount is in large part a function of a stock price that has gone nowhere of late. While the broad market has been making repeated new highs over the past year, Wal-Mart shares continue to trade well below their 52-week high and not too far above the 52-week low.
Now you could argue there’s plenty of good (as in, bad) reasons for why Wal-Mart’s stock is down around 3% over the past year, while the S&P 500 rose 6%. As the latest earnings report made clear, Wal-Mart is not firing on all cylinders. But nor is the model imploding either. There are a whole lot of companies that would be happy to take on the problem of $35 billion in EBITDA and $12 billion in free cash flow.
And while the consumer defensive sector in the S&P 500 trades at more than 18x this year’s estimated earnings and nearly 17x 2015 estimates, Wal-Mart stock at 15x and 14x for both time periods is priced a bit like Wal-Mart merchandise.
Does Wal-Mart have some working-out to do? Absolutely. It said as much, especially the need to get the mix of superstores and smaller neighborhood stores right. But given the continued slow growth in consumer income, Wal-Mart’s ability to deliver low cost merchandise should remain an important advantage.
Meanwhile, the patient value investors are no doubt happy to be patient as long as they can pocket some shareholder returns even when the price isn’t going much of anywhere. Among Buffett’s top 5 positions, IBM is quite an outlier on shareholder yield, but Wal-Mart keeps pace with the shareholder yields for Coca-Cola and Amex. (Wells Fargo doesn’t really belong in the mix, as its dividends are still limited by federal regulars along with all the other TBTF banks.)
And a solid chunk of that shareholder return is from dividends, which have more lasting value than amorphous buybacks. No one will ever confuse the past five years as robust for Wal-Mart, yet Wal-Mart has strong dividend growth, at an inflation-beating pace, while Wal-Mart’s payout ratio remains below 50%. As we've noted in the past, buybacks have substantially reduced shares outstanding, goosing Wal-Mart’s EPS.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.