Wal-Mart Stores, Inc.: Wealth from Dividends
Less than a year later, I was sitting at a Kentucky Fried Chicken near Kansas City with my business partner. Having just completed a reading of Sam Walton’s autobiography, I had gone on a mission, pouring through nearly every Wal-Mart Stores annual report back through the 1970’s to present day.Those on Wall Street who insisted that its competitors were simply not as well managed were only half right: It became apparent as I immersed myself into the Bentonville company that it had a structural advantage in its supply chain that its competitors simply could not match. In other words, Wal-Mart could get the same tube of toothpaste from Procter & Gamble onto its shelves and often sell it at a lower price than its competitors could purchase it for thanks to that distribution system. As gas prices rose, this would become an even more powerful force for the retailer as competitors were forced to raise prices at the very time the average consumer needed to cut back to save money.
How did I know food prices and other costs were rising a year or two before the average citizen? Buried within the pages of companies as diverse as General Mills, Panera Bread, Kellogg’s, and Starbucks were warnings from executives that input costs were rising and they were doing everything they could to hold the line and not pass those on to consumers. That, however, can only go on for so long.
At the same time, I had been toying with the idea of expanding my dividend-based portfolio to encompass a bigger part of my personal holdings. This decision was as much emotional as anything else: I loved the idea of owning the same stocks for decades. Most of my positions, involving everything from merger arbitrage on companies such as Yankee Candle and Direct General before they were bought out to deep value turnarounds, weren’t designed to be held for ten or twenty years. I wanted something that I could watch grow, like a farmer. That may sound a little hokey, but I’ve always told you that finances are personal and the decisions you make should be geared toward your own temperament. It’s not just about maximizing cash, although that is the primary goal. We each have our own utility factors – if you love water companies because you worked for a filtration plant, you might be willing and happier to get 10% compounded from those stocks than 12% from the pharmaceutical sector. That’s okay.
It was over this chicken dinner that I decided Wal-Mart wasn’t been fully valued and it would make a great addition to this special portfolio that I had setup with the purchase of the U.S. Bancorp stock. I promptly contacted my broker and bought shares at $45.75 each with the same instructions: Reinvest the dividends and leave the position untouched.
The Wal-Mart Stores stock, only 2½ year later, has worked out as follows:
- I own 4.65% more shares than I did when the original stake was purchased, all from reinvested dividends
- The annual dividend rate has increased from $0.60 to $0.95 per share, giving me more cash income for each share of stock owned
- The market price has increased from $45.75 to $62.00, or $16.25 per share in unrealized capital gains
The result is a total gain of roughly 41.83%, all sheltered from taxes. I wouldn’t care if the stock were up, or down, 30% tomorrow morning provided that the underlying economics of the business were intact and I expected the firm to continue generating attractive returns on shareholder capital at ever-increasing rates.
The biggest disadvantage investors have when it comes to achieving these rates themselves is that there is very little day-to-day, or even quarter-to-quarter action. You just sit, and watch, as the stock price appears to go nowhere. You have to understand that this style of investing is akin to paint drying or crops growing for the harvest – it’s going to be a slow, steady process that won’t require a lot of effort once the initial buy decision has been made. The biggest danger is that the firm experiences a decrease in its intrinsic value – that is, in the future cash it expects to generate for owners (think of a horse and buggy manufacturer when the automobile came along, or makers of VCR’s who refused to get into the DVD business).
