This morning before the open, retailing behemoth Walmart (WMT) reported the first $100 billion in sales quarter ever by a retailer.
To put that number in context, the personal consumption part of Gross Domestic Product (GDP) in 2007 was $9.7 trillion (total GDP was $13.8 trillion (BEA 4Q GDP Release)). At an annualized rate of $400 billion, then, Walmart represents about 4% of all consumer expenditures in the United States!
Walmart reported earnings of $1.04 per share, excluding items – beating analyst expectations by 2 cents. Its forecast was a little weak (WMT FY 4Q Earnings Release) but, of all retailers, Walmart, with its relentless focus on costs and prices, should hold up best in a difficult, possibly recessionary, environment.
At a forward multiple around 14, a 1.75% dividend and its stock acting well of late, Walmart is somewhat attractive here (around $50).
The only problem is that being such a massive company, it takes a lot to move the dial. Even if Walmart performs superbly, it probably can’t grow earnings more than 8-10% a year which corresponds to an 8-10% annual gain in share price as long as the mulitple stays the same.
One way to juice your returns a bit is to buy Walmart shares and sell covered calls on them. For example, you could buy the shares at $50 and sell the Jan09 $50 calls for $5 each. That gives you a 10% return on your investment right off the bat.
What this does is essentially cap your gains on the shares at 12% – the 10% premium and the 2% dividend. If the shares finish in the money, the buyer of the calls you sell will excercise and you will turn over the shares. Your return will be 12%.
If the shares go down, the calls will finish out of the money and your return will be 12% minus however much Walmart’s shares lose.
The only way you lose money on this trade is if Walmart loses more than 12% over the course of the year in which case the call premium and dividend don’t cover the share price decline on the shares you hold.
This is a good way to make 12% by holding a very safe stock that should do well in a difficult environment.
Disclosure: Top Gun is long Walmart (WMT) and short Walmart calls.