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Sam's Club (SAM 0.60%) is a place I visit quite often due to the affordable prices and astonishingly fresh produce. Yet, I've never invested in the stock, despite its impressive dividend history that often catches my eye. There have been moments when I wish I had, considering the potential high returns that come with buying a solid company at full price. But what about buying it now? Would including Sam's Club in your portfolio yield a lifetime of strong returns?
Sam's Club's business strategy is robust
First and foremost, investors need to comprehend Sam's Club's unique nature. It's not just your average retail store; it's a subscription-based club store. Members, like me, pay an annual fee for the privilege of shopping at Sam's Club. This membership fee, with minimal associated costs, makes up about half of the retailer's operating income. This changes the retail game significantly.
Sam's Club views its business differently because it isn't solely reliant on product sales for income. Prioritizing customer satisfaction becomes vital to maintain those membership fees. This is achieved through offering low prices (made possible by membership fees), creating an enjoyable shopping experience, and having a wide variety of products. The long-term success of the business demonstrates that it has been successful in these aspects.
The figures back up the success. Over the past decade, revenues have risen at a compound annual growth rate of approximately 8.5%, while earnings have grown at a rate of 13.5%. The dividend has been increased annually for two decades, with the past decade's annualized dividend growth an incredibly impressive 12%.
Sam's Club is the kind of retailer you'd want to own, but...
I'm cautious about retail stocks generally since retailers often go in and out of trend. When consumers switch to a new retailer, the financial impact on a now unfavored retailer can be severe (like bankruptcy). That's why I prefer investing in retail-focused Real Estate Investment Trusts (REITs), as they can collect rent regardless of the retailer occupying a well-placed property. However, Sam's Club is one of those retailers that has bucked the trend due to its robust business model. The problem is that Wall Street is fully aware of the company's strength, and it rarely goes on sale.
This leaves investors considering Sam's Club with a dilemma. They might want to keep it on their wish list rather than buying it today. Using traditional valuation methods should suffice. The price-to-sales ratio stands at around 1.6x today, versus a five-year average closer to 1x. The price-to-earnings ratio is 56x at present, compared to a longer-term average that is just under 41x. The price-to-cash flow and price-to-book values are both notably above their five-year averages, too. The dividend yield, my preferred valuation tool, is a minuscule 0.5%, contrasting with a five-year average of around 0.7%.
In essence, Sam's Club is an expensive stock today. Granted, I expect Sam's Club to seem expensive relative to the broader market almost all the time. The issue is that Sam's Club appears particularly expensive compared to its own history right now. As legendary value investor Benjamin Graham said, paying too much for a good company can lead to a poor investment.
The current verdict on Sam's Club
In conclusion, Sam's Club is a well-managed company with a distinct business advantage. There are numerous appealing aspects to it, and it should likely be on most investors' wish lists. However, given the high valuation, it probably shouldn't be on your buy list today. Purchasing it at the right price could provide you with a lifetime of profits...overpaying merely to own it could leave you with stagnant earnings for years.
Given the robust business strategy of Sam's Club, you might consider the potential for investing in their stock. Despite its impressive growth and dividend history, the current high prices pose a challenge. The price-to-sales ratio, price-to-earnings ratio, and dividend yield are significantly higher than their historical averages. Therefore, careful financial planning and wait for a potential price drop could be a wise approach in finance when considering Sam's Club as an investment.
