Wal-Mart still a 'buy,' despite controversies


I recently started an individual retirement account and own shares of Wal-Mart Stores Inc. What is the outlook for the company?

- C.C., via the Internet

The world's biggest retailer, with more than 4,750 stores worldwide, is on the offensive. It is opening prototypes of smaller stores so it can expand into urban areas that have taken steps to ban 184,000-square-foot Supercenters. Stores being tested are less than half that size, which means drugstores, supermarkets and dollar stores will soon be facing tough new competition.

At the same time, Wal-Mart's legal staff is challenging bans on the Supercenters, which combine supermarkets with discount stores.

The company operates about 1,475 Wal-Mart discount stores, 530 Sam's Clubs and 1,430 Wal-Mart Supercenters. It plans to open about 220 new Supercenters this year and has been converting a number of discount stores into Supercenters.

Chief Executive Officer Lee Scott recently said he is "very excited" about expansion in India, Russia and China. The retailer's money-losing German operation is gradually improving, Scott added.

U.S. sales this year are likely to be modestly better than last year's, Scott predicts. Wal-Mart is also forming new relationships, such as leasing space in 100 of its stores to sandwich maker Blimpie International for Blimpie Xpress restaurants, with the first two locations in Florida opening in April.

Shares of Wal-Mart (WMT), Fortune magazine's "most admired company," are up 6 percent this year after a gain of 6 percent last year. The retailer recently approved a $7 billion share buyback plan.

Some of Wal-Mart's most aggressive efforts are in public relations, where it seeks to regain its positive image as a friendly, low-price competitor.

To do so, it must reverse more recent negative images of the company as a low-wage, weak-benefits employer that imports heavily from China and often is battling cases of sex discrimination and wage violations.

It also received negative headlines last fall from a federal investigation into its use of a cleaning contractor that employed illegal immigrants.

Wal-Mart's latest public relations efforts are visible everywhere, including an advertising campaign that features some of its female managers. It is also disputing any news coverage that it believes to be inaccurate or unfair.

Despite controversy about the company, the consensus rating on Wal-Mart shares is "buy," according to the Boston-based First Call research firm. This consists of nine "strong buys," 10 "buys" and 11 "holds."

Wal-Mart earnings are expected to increase 12 percent this year, vs. the 7 percent forecast for the broad-line retailing industry, according to First Call. The projections of a 14 percent gain next year and 14 percent five-year annualized growth rate are both about 1 percent less than that predicted for its peers.

What were the three worst "Dogs of the Dow" in 2003?

- R.L., via the Internet

The "Dogs of the Dow" strategy involves buying at the beginning of the year the 10 stocks from the Dow Jones industrial average with the highest dividend yields.

Their high yields likely indicate their stock prices are depressed, which is why they're dogs, but management doesn't want to draw attention to problems by cutting the dividend.

The underlying belief is that such blue chips are certain to rebound because of who they are. Since the end of 1972, Dow dogs have returned 16 percent annually vs. 12 percent for the Dow.

Worst-performing of the dogs in 2003 were Eastman Kodak, down 24 percent; AT&T;, down 19 percent; and SBC Communications, up 2 percent.

Best-performing were Caterpillar, up 86 percent; J.P. Morgan Chase, up 60 percent; and General Motors, up 53 percent.

"The strategy is to go for the highest dividend yield because investors will be attracted to them, and the more who buy the stock, the higher your stock price goes," said Sam Stovall, senior investment strategist with Standard & Poor's.

Entering 2004, the Dow dogs ranked by highest dividend yield were Altria, SBC Communications, AT&T;, General Motors, J.P. Morgan Chase, Merck, DuPont, Citigroup, General Electric and ExxonMobil.

What's your opinion of Dodge & Cox International Stock Fund? I understand it is only a few years old but has good managers.

- R.L., via the Internet

While this fund has been around only since mid-2001, its sibling Dodge & Cox Stock Fund has been around a long time and has always included foreign stocks.

This fund is run by the Dodge & Cox international policy committee, a six-person group of managers with average tenure of 16 years at the company. Several serve on the Dodge & Cox Stock Fund committee.

Results from this experienced team are worth crowing about.

The $114 million Dodge & Cox International Stock Fund (DDEX) rose 58 percent over the past 12 months to rank in the top 10 percent of all foreign large value funds.

"This is a good fund for someone looking for a value-oriented foreign fund," said William Rocco, an analyst with Morningstar Inc. in Chicago. "It has low turnover, doesn't hedge and is willing to go wherever bargains are."

It seeks undervalued stocks based upon management, dominant position and growth potential. However, its value emphasis won't fly high in growth stock rallies, and its many smaller stocks will hold it back whenever big blue-chips dominate.

About half of the fund's holdings are in the United Kingdom and Western Europe, and about one-quarter are in Japan. The rest of Asia represents about 14 percent, and Latin America 8 percent. Its largest stock holdings were recently Sony, KT Corp., News Preferred, Akzo Nobel, Electrolux, Imperial Chemical Industries, Basf, Total, Aderans and Nestle.

The Dodge & Cox fund family is shareholder-friendly, has a lot of its own money in its funds and keeps expenses low. This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment. Its annual expense ratio is 0.90 percent.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.

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