Motley Fool: Wal-Mart a solid, safe stock pick

Are you worried about deflation? Inflation? To best position your portfolio, you need holdings that can gain competitive advantages even in the worst economic environment. Wal-Mart (NYSE: WMT) fits the bill.

Wal-Mart sells products everyone needs, and racks up an astounding $47 million in sales every hour of every day, making it the world’s largest retailer. It’s committed to being the low-cost leader, and with $417 billion in annual sales, it can wrest concessions from the most powerful suppliers. When economic conditions worsen, Wal-Mart gains an advantage over less capable rivals.

Wal-Mart’s sales growth has recently slowed, but it’s pursuing several avenues for continued growth. It’s expanding into American urban markets with smaller-format stores, and expanding its tentacles into additional consumer areas, such as banking. The company’s international operations are growing, too, in India, China and elsewhere.

Strong operations have allowed Wal-Mart to pay and quickly increase its dividend. This attractive payout makes it particularly suited for tough times. With a recent yield of 2.4 percent, the company has piled on increases at the remarkable rate of 16 percent per year over the past five years.

If you like the prospect of continued growth and the safe payouts offered by a blue-chip retailer, Wal-Mart looks like a stock for all seasons. (Wal-Mart is a “Motley Fool Inside Value” pick and The Fool owns shares of it.

Q: How does stock ownership really work? If I own 20 percent of a company’s stock and the company earns $10 million, will I automatically earn 20 percent of that, or $2 million? – S.O., Tucson, Ariz.

A: Not exactly. If you own stock in a public company, you do own a real (usually rather small) chunk of it. But not all the money the company makes is automatically distributed to its owners.

Companies have choices regarding their profits. Some earnings are often distributed to shareholders in the form of a dividend. With what’s left, the company may choose to pay down its debt or to reinvest in the business by building factories, hiring more workers, buying advertising, and so on. It may also buy back some of its stock or buy another company, or simply bank the money, waiting for an exciting opportunity.

All these options can reward shareholders, sometimes even more so than if the money were just distributed as dividends. Buying back (and essentially retiring) shares, for example, boosts the value of the remaining shares. Reinvesting in the business can result in a bigger, more profitable business — with higher earnings.

Q: I’d like to give small gifts of stock to my grandchildren. How can I do that? – E.M., Honolulu

A: Consider opening a direct investment plan account with one or more companies. Often called “Drips” or direct stock purchase plans, they let you bypass brokers when buying stock. Learn more at www.fool.com/School/drips.htm, www.dripinvestor.com, and www.directinvesting.com. There are also some companies specializing in gifts of stock, such as www.registerstock.com and www.oneshare.com – just know that they can be a little pricey. These sites can charge you $15 or $40 to buy a $25 stock.

I bought shares of the defense contractor Argon ST on speculation, after hearing that the company was looking to be bought, possibly by Raytheon. Nothing happened, though, and the stock stagnated. Meanwhile, it looked like Apple was getting a little cheaper. So in order to be able to buy some Apple, I sold my Argon shares. The next day, Boeing announced it was buying Argon for $10 more per share than I’d paid for it! Grrr! – S.B., Waukesha, Wis.

The Fool responds: There’s an adage on Wall Street to “buy the rumor, sell the news.” That’s nice, except that you rarely know when the news will happen, and plenty of rumors are false to begin with. That can tie up a lot of money unproductively.

In this situation, you’d have done well to determine whether Apple or Argon was more undervalued and which one you had more confidence in. The timing of Boeing’s announcement was frustrating, but remember that unless you’re trading illegally on inside information, you’re not likely ever to be able to time a stock transaction perfectly.