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Wal-Mart (NYSE: WMT) shares cratered last week after the company predicted that profits will drop as much as 12% in its next fiscal year. The stock fell 10% on Wednesday – its biggest single-day decline in more than 27 years – and at $58.89 per share Wal-Mart is now down more than 30% year-to-date.
While the Sam Walton family isn’t happy, neither is Warren Buffett.
Buffett’s big bets on large, seemingly stable, dividend-paying companies haven’t been working out over the last few years.
The dividend yields he’s been collecting from the likes of Wal-Mart, American Express (NYSE: AXP), International Business Machines (NYSE: IBM) and Procter & Gamble (NYSE: PG) have done little to offset the losses he’s seeing from their stock declines.
Since the start of 2014, all four of the above stocks are negative, with a couple down 20%. What’s more is that five of his top six holdings are now underperforming the S&P 500 for the year. The only exception is Wells Fargo (NYSE: WFC), which recently saw its stock fall after posting disappointing earnings.
Top Buffett Dividend Stock
IBM is the cheapest of Buffett’s top holdings. However, it’s been cheap for a while. Shares of IBM are up just 6% over the last five years, while the S&P 500 is up 77%. Pointing out IBM’s 3.5% dividend yield provides little solace for IBM shareholders.
The dividend yields on some of these stocks, however, are outperforming the S&P 500. The average S&P 500 dividend yield is just over 2%, but the likes of Wal-Mart, Coca-Cola (NYSE: KO), IBM and Procter & Gamble are yielding over 3%.
Picking the one Buffett dividend darling that won’t lose over the next couple of years isn’t easy. Many investors who bought IBM for 12.5 times earnings and a 2% dividend yield back in 2014 haven’t fared well.
The problem with buying any of these companies is that many of Buffett’s dividend stocks are huge companies that are getting disrupted by smaller, more nimble, players. There are broader demographic trends working against the companies as well.
American Express has to figure out how to navigate the impending mobile payments insurgence. Procter & Gamble is facing intense competition from local peers in emerging markets.
Coca-Cola has held up fairly well among Buffett’s dividend stocks, but it could be the next shoe to drop, with the company facing pushback against sugary sodas. It also recently passed on an investment in Greek yogurt maker Chobani. Let’s hope it has something up its sleeve.
Wal-Mart has been the biggest disaster of late, but it could be Buffett’s best dividend stock.
Buying the Fear
Granted, Wal-Mart has been below $60 a share as recently as three years ago, but we’ve never seen its dividend yield as high as its current 3.3% mark. And the stock’s price-earnings ratio of 12 is down near all-time lows.
The market balked at Wal-Mart’s fiscal 2017 guidance, which stated that earnings are expected to fall by 6% to 12%. But the market is likely being shortsighted here and isn’t giving Wal-Mart enough credit for its investments in e-commerce and wage hikes.
Wal-Mart has spent many years building up a global brand with vast cost advantages and new initiatives. This includes its Neighborhood Market stores, which can help protect – and ultimately take – market share from smaller competitors and dollar stores. This could be key to helping turn around Wal-Mart’s recent misfortunes in the grocery business. Last quarter, the comparable-store sales for Neighborhood Market stores were up 7% and e-commerce increased 20%.
Beyond that, Wal-Mart’s focus is on becoming a full-service retailer, with the goal of being able to serve online shoppers with e-commerce; the basic needs market with Neighborhood Markets; the stock-up shopper with Wal-Mart Supercenters; and the buy-in-bulk customer with Sam’s Club. Wall Street is overlooking the fact that it might take some time before sales catch up to investments.
In the end, no matter how high the dividend, it can only protect you so much when a stock crumbles. It’s truly about the ability to turn around the brand and rekindle growth that makes these types of stocks value plays and not value traps.
Wal-Mart, the world’s largest retailer, has a huge footprint and various cost advantages that give it a wide moat, which should help it protect its current market share as it invests for the future.
While all stocks struggle from time to time, the editors at High Yield Wealth have assembled a group of “forever stocks” that investors can feel confident holding for the long term. Click here for more details.