A Brief History of Wal-Mart's Returns


Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

  1. Dividends.

  2. Earnings growth.

  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Wal-Mart (NYS: WMT) .

Over the past 10 years, Wal-Mart has returned a total of 20% to shareholders. How'd it get there?

Dividends accounted for essentially all of it. Without dividends, Wal-Mart returned just 2.7% over the past decade.

Earnings growth over this period was substantial. Over the past 10 years, earnings per share grew at an average of 11% per year -- well above the overall market average. That's an incredible performance for a company of Wal-Mart's size. It can't be stressed enough: Internally, Wal-Mart has performed well over the past decade.

Yet shareholder returns have been dismal. Why? The chart tells the story:


Source: Capital IQ, a division of Standard & Poor's.

The collapse of Wal-Mart's earnings multiple over the past decade is a thing of amazement. Not only is the magnitude stunning -- the multiple has collapsed by a factor of nearly four -- but the consistency of the decline is relentless. Even after the global economy and broader stock market stabilized in 2009, Wal-Mart's earnings multiple kept right on plunging.

What happened? Shares were simply overvalued for most of the past 10 years -- the bulk of the multiple decline is a return to a sense of normality. The question now is whether the correction has been overdone. There's a good chance that's the case. At less than 12 times earnings, Wal-Mart is being priced as a decidedly average company, when it is anything but. Its supply chain, economy of scale, and pricing advantages still give it a strong leg up on competitors Target (NYS: TGT) on one end and Dollar General (NYS: DG) on the other. This is still a high-quality company, and in terms of changes in earnings multiples, the coming decade is unlikely to look anything like the past one.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

At the time thisarticle was published Fool contributorMorgan Houselowns shares of Wal-Mart. Follow him on Twitter, where he goes by@TMFHousel. The Motley Fool owns shares of Wal-Mart Stores.Motley Fool newsletter serviceshave recommended buying shares of and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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