Wal-Mart (WMT) is arguably the biggest American business success story. The first Wal-Mart store opened in 1962 in Rogers, Arkansas. It was founded by Sam Walton, who created Wal-Mart with a simple vision: offering the lowest prices anywhere, anytime.

This philosophy allowed the company to expand quickly.

By 1967, The Walton family owned 24 stores, which collected $12.7 million in sales.

In 1972, Wal-Mart went public and was listed on the New York Stock Exchange. At the time, it had 51 stores, and $78 million in annual sales.

Today, Wal-Mart is the largest retailer in the world. It generates nearly $500 billion in annual sales. Along the way, it has richly rewarded investors with rising profits and dividends.

Wal-Mart’s first dividend was $0.05 per share, paid in 1974. It has increased its dividend each year since then. That makes 43 years in a row of dividend increases each year, which qualifies Wal-Mart as a Dividend Aristocrat.

You can see the entire list of Dividend Aristocrats by clicking here.

Keep reading this article to learn more about the investment prospects of Wal-Mart.

Business Overview

Wal-Mart operates 11,500 stores, located in 28 countries around the world. It is organized into three operating segments:

• Wal-Mart U.S. (62.3% of sales)
• Wal-Mart International (25.8% of sales)
• Sam’s Club (11.9% of sales)

The Wal-Mart U.S. segment is Wal-Mart’s biggest. It operates retail stores in all 50 states in the U.S., Washington D.C. and Puerto Rico. It includes its digital business.

Walmart International is its second-largest segment and consists of operations in 27 countries outside of the U.S.

Lastly, Sam’s Club consists of membership-only warehouse clubs and operates in 48 states in the U.S. and in Puerto Rico.

Wal-Mart has an amazing history of growth, but lately growth has been hard to come by. Wal-Mart’s total sales fell 1% last fiscal year. Earnings-per-share declined 10% from the previous year.

Wal-Mart is struggling with a number of headwinds. First, Wal-Mart is being impacted by higher spending in the U.S. to raise employee wages and improve the condition of its stores.

Wal-Mart’s brand image has taken a hit on these fronts, and the company is spending more to fix the problems. Last fiscal year, the company announced $2.7 billion in new spending initiatives to improve its wages and better train its associates.

In addition, Wal-Mart’s international business is being negatively impacted by the strong U.S. dollar. In fiscal 2016, Wal-Mart International posted a 9.4% drop in sales. Sales were weighed down to the tune of $17.1 billion because of foreign exchange.

Investors should be in favor of Wal-Mart’s spending initiatives. They are likely to help restore growth over the long-term.

Nevertheless, higher spending will weigh on Wal-Mart’s earnings-per-share in the near term. Management expects adjusted earnings-per-share will decline 7% this fiscal year.

And, the company does not expect a return to earnings-per-share growth until fiscal 2019. That being said, there does seem to be some improvement in Wal-Mart’s growth prospects.

Growth Prospects

Wal-Mart’s comparable sales, which are its sales at stores open at least one year, increased 1.6% last quarter. That was the eighth consecutive quarter of positive growth in U.S. comparable sales.

Going forward, Wal-Mart stands to benefit from two key growth catalysts: e-commerce and smaller stores.

Wal-Mart has a booming e-commerce business. It is now the second-largest online retailer in the U.S. From fiscal 2013-2016, Wal-Mart grew e-commerce sales by 107%. This has significantly shifted Wal-Mart’s business model toward e-commerce.

Source: 2016 Investor Meeting Presentation, page 14

The e-commerce business regularly posts double-digit growth, which is way ahead of its brick-and-mortar operations. Last quarter, e-commerce sales rose 12%.

Plus, Wal-Mart’s $3.3 billion acquisition of Jet.com will help grow the e-commerce business even more.

Source: 2016 Investor Meeting Presentation, page 4

The other key growth catalyst for Wal-Mart is its small-store format, which is operates under the Neighborhood Markets banner.

These stores have smaller footprints, and are designed for large cities and suburbs that cannot provide the necessary square footage to build a Supercenter.

As of last quarter, Wal-Mart had 687 Neighborhood Markets stores in operation.

Its small-stores are growing rapidly. Comparable sales at Neighborhood Markets increased 7% last quarter.

Competitive Advantages & Recession Performance

Wal-Mart’s main competitive advantage is scale. Its massive size is truly impressive: Wal-Mart serves more than 260 million customers each and every week.

It has a massive distribution network spread across the country. This allows it to keep transportation costs low. And, Wal-Mart’s huge size allows it to put pressure on its suppliers to reap the best deals possible.

This gives Wal-Mart the ability to pass the savings onto its customers. That is the key component of its everyday-low-prices initiative.

Wal-Mart’s constant focus on expense management yields tangible results.

Source: 2016 Investor Meeting Presentation, page 16

Wal-Mart performed phenomenally well during the Great Recession of 2007-2009. The company steadily grew earnings-per-share each year in that time.

• 2007 earnings-per-share of $3.16
• 2008 earnings-per-share of $3.42 (8.2% growth)
• 2009 earnings-per-share of $3.66 (7% growth)

The reason why it was able to grow during the worst recession since the Great Depression is that Wal-Mart is a recession-resistant business. In fact, it actually benefits from recessions, as consumers typically scale down their spending when times are tight.

Wal-Mart stock was one of only two components in the Dow Jones Industrial Average to increase in value in 2008—the other being McDonald’s (MCD). Wal-Mart is perhaps the single best stock to own during recessions.

Valuation & Expected Total Return

Wal-Mart stock trades for a price-to-earnings ratio of 15.3. It is considerably cheaper than the S&P 500 Index, which has an average price-to-earnings ratio of around 24.

The stock is also cheap relative to its historical average. Since 2000, Wal-Mart stock traded for an average price-to-earnings ratio of 16.

As a result, Wal-Mart stock appears to be slightly undervalued at its current price.

Future returns will be comprised of the following factors:

• 6%-8% earnings-per-share growth
• 3% dividend yield

Earnings-per-share growth will be comprised of 3%-4% sales growth, 1% expense reductions, and 2%-3% from share repurchases.

As a result, shareholders may earn 9%-11% total returns each year moving forward.

Final Thoughts

Lately, Wal-Mart has seemed like a lumbering giant. But it is proving to be nimbler than one might think from the largest retailer in the world.

Its financial strength allows the company to quickly capitalize on its growth initiatives, particularly e-commerce and smaller stores.

Wal-Mart’s earnings-per-share are stagnating now, but it has set a path for future growth. With a 3% dividend yield and dividend growth for more than four decades, it is a dividend growth stock worth owning.

The company ranks highly using The 8 Rules of Dividend Investing thanks to its decent growth prospects, safety, and above-average dividend yield.