Hot Stocks: Wal-Mart Stores Inc. (NYSE WMT) Proves that the Best Defense is an Active Offense

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Wal-Mart Stores Inc. (NYSE WMT) has the reputation of being a defensive stock, but lately the company has gone on the offensive. For that reason, it's a good candidate to break out of its recent slump and head higher.

Wal-Mart has been among the stocks to lose ground in the recent market correction. But with more than $400 billion in annual sales, the world's largest retailer is still one of the soundest plays an investor can make – particularly in times of uncertainty.

In the year and a half stretching from January 2008 to June 2009, Wal-Mart stock managed a 3.45% gain despite being interrupted by one of the worst stock market plunges in history.

Shoppers flocked to the low-cost retailer as the economy deteriorated. And if the U.S. economy slips into a double-dip recession, or the recovery simply stagnates, Wal-Mart will again prove its value as a reliable portfolio holding. And should the global economy make a miraculous recovery, Wal-Mart's strong dividend yield and international growth plans will accelerate a recovery in the company's shares, which have tumbled more than 5% since the start of the year.

Wal-Mart reported first-quarter net income of $3.3 billion, or 88 cents a share, with sales of $99.85 billion. That beat analysts' estimates, as well as its own. The company forecast second-quarter earnings of 93 cents to 98 cents a share.

If there was a cause for concern, though, it was that same-store sales slid 1.4%. That followed a 1.6% decline in the fourth quarter of 2009.

Critics point to increased activity at high-end retailers as a major factor behind those declines. But that trend isn't likely to last.

The U.S. economy is approaching an impasse as stimulus efforts wear off and unemployment remains high. For that reason, many analysts believe the boost luxury brands received earlier this year will fizzle as the public becomes more pessimistic about the economy's prospects – especially if the stock market continues its decline.

Analysts say that would actually be good for Wal-Mart.

"After hearing from all lines of business, we continue to believe Walmart is one of the best positioned retailers for this environment," Deutsche Bank AG (NYSE: DB) said in a research note.

Deutsche Bank raised its second-quarter earnings estimate for the retailer to 97 cents from 96 cents and its full-year outlook to $4.03 from $4.00 a share. The bank reiterated its "Buy" rating and $66 price target on Wal-Mart shares.

Wal-Mart closed yesterday (Wednesday) at $50.99 a share. At that level the company is yielding 2.4%. An attractive dividend yield and solid history of dividend increases is another reason to like Wal-Mart shares.

Wal-Mart has increased its dividend payout every year since 1999. In that time the annual payout has jumped to $1.21 from 20 cents, and its quarterly dividend rose 11% to $0.3025 from $0.2725. That means Wal-Mart's dividend doubles every 6-7 years.

Furthermore, the company's board said last week at its annual shareholders meeting that it approved a $15 billion share buyback program. The plan replaces the existing $15 billion program, which had about $5 billion remaining. Wal-Mart has bought back $18.5 billion of shares the past three years – a strong vote of confidence from management.

"Mgmt continues to see real opportunities to grow sales, aside from the emerging benefit of food inflation," said Deutsche Bank. "In addition, Mgmt announced a new $15B share repurchase program… We recommend purchase of WMT shares given the company's very strong competitive positioning in a still-challenging consumer-spending environment."

Global Growth

In addition to its inherent strength in the United States, Wal-Mart is also moving forward with ambitious international growth plans – something the company's chief executive, Michael Duke, stressed at its shareholders meeting earlier this month.

"I want all of you to be able to say that at this moment Wal-Mart committed to being a truly global company, and began building the next generation Wal-Mart," Duke said.

Duke, who took over for H. Lee Scott Jr., was formerly the head of the Wal-Mart's international division.

Wal-Mart currently operates in 15 countries, with just under half of its 8,300 stores located outside of the United States. International sales last year topped $100 billion for the first time ever, rising to about one-quarter of the company's total gross intake. And while U.S. same-store sales have declined in the first quarter, international sales rose 8.9% on a constant-currency basis.

Wal-Mart now is looking to build on that momentum going forward.

More than 60% of the new square footage the company added in the first quarter was built outside of the United States. And Wal-Mart plans to add some 500,000 worldwide over the next five years.

Deutsche Bank Securities senior analyst Bill Breher, who attended the shareholder meeting, told the New York Times that Wal-Mart's international sales would eventually surpass its domestic intake.

"We expect Wal-Mart will eventually be as big in China as they are in the U.S. now, and grow double-digit annual sales increases in Latin America," he said.

Wal-Mart already has a sizable presence in China and Brazil, and is "planting seeds" in Chile and Argentina in Latin America, Cathy Smith, Wal-Mart International's chief financial officer told Reuters.

The company has also turned an eye towards "BRIC" countries India and Russia.

In fact, the company is already rumored to be in discussions with potential partners in Russia. Rumors surfaced in May that Wal-Mart was in preliminary talks to acquire Russian retailer Lenta.

"We did make a decision, particularly when the economic downturn occurred, that an acquisition is probably the best way to enter the market," Wal-Mart International president and chief executive Doug McMillon told Reuters without naming a potential target.

But he added: "To make an acquisition, a buyer and seller have to come together on terms. We'll make a decision when it's the right time and we have the right entry opportunity and not before then."

Asada Group Ltd., Wal-Mart's U.K. retailer, last month agreed to buy Netto's 193 U.K. supermarkets for $1.13 billion. That deal was the company's largest since it purchased Chilean grocer Distribucion y Servicio D&S SA for $1.88 billion last year, and it cement's Wal-Mart's position as the United Kingdom's No. 2 food retailing market.

Admission into India's growing retail sector has been made far more difficult by rules that prohibit foreign direct investment (FDI) in multi-brand retail businesses. But that may be about to change.

Wal-Mart, which already has access to India's wholesale market through its joint venture with Bharti Retail, is lobbying the U.S. government to advocate on its behalf. The company spent $1.9 million lobbying lawmakers on issues ranging from credit card reform to organized crime and food safety issues, according to a recent disclosure report. That includes "discussions on India and Foreign Direct Investment," and enhanced market access for investment in China and India," the report noted.

Wal-Mart spent $1.8 million lobbying Congress in the fourth quarter of 2009 and $2 million in the first three months of last year.

Wal-Mart's enormous sphere of influence, which is growing with each foreign acquisition and $100 billion quarter, is the main reason why analysts believe the company's stock will bounce back with vigor. And, at worst, the retailer's low-cost mandate makes it a favorite in adverse economic conditions.

"I don't think they want their consumer under as much pressure as their consumer is under," Patricia Edwards, founder of wealth management firm Storehouse Partners, told Reuters. But "if they can somehow ramp up the international growth further than they have, then I think it's got some legs, potentially. If not, it is a defensive play."

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