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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.

V.T.
Wilmington, N.C.

Dear V.T.: The U.N. is a cesspool of political freeloaders who are there to butter their own nests. And I suspect that your friend’s skill level as an economist precludes his employment by a legitimate entity.

In 2004, Wal-Mart Stores (WMT-$76.27) traded in the low $60s, generated $220 billion in revenues, earned $1.50 a share and paid a 30-cent dividend. Revenues have since more than doubled, to $480 billion, and share income has more than tripled, to $5.15. And as Wal-Mart’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, Wal-Mart traded between $40 and $64. Wal-Mart was perceived as too huge to be flexible, too massive to maintain momentum and too sizable to innovate, though revenues continued to grow. However, Wal-Mart’s 30-cent dividend in 2002 has zoomed to $1.92 this year 鈥� 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. Wal-Mart 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, Wal-Mart’s labor costs would increase by $50 million a week. So a $1-an-hour wage hike would increase Wal-Mart’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, Wal-Mart would need $73 billion more 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, Wal-Mart could be a superb investment because this massive empire still has power in its fist. Its smaller neighborhood store format (management will open 270 this year) may eventually generate 25 percent of Wal-Mart’s retail revenues. Those stores are a big hit and popular among customers who replenish their pantries frequently. And Wal-Mart’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, some observers believe e-commerce within the next decade could generate 20 percent of revenues.

And Wal-Mart is entering the banking business with a nationwide rollout of GoBank, a checking account linked to a MasterCard debit card and with 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. Wal-Mart’s GoBank will certainly challenge the 鈥済ood old boy鈥� banking system and knock those grabby-greedy 鈥渂anksters鈥� on their bums. Last year, Wells Fargo, Bank of America, Fifth Third Bank and the like collected $31.6 billion in overdraft fees. Fifth Third, for instance, really stabs customers in the back with its exuberant $37 overdraft charge, though it permits customers to have 10 overdrafts a day. GoBank will eliminate these and other fees that are used to bleed depositors to increase earnings. Some 鈥渂anksters鈥� are getting nervous because, by hook or ladder, they know that Wal-Mart will change the way America banks and borrows, which will threaten their jobs.

Hold your Wal-Mart shares, 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.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at [email protected].
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