Is the Walmart Sell-Off Warranted or Is the Dividend King Stock a Buy Now?

Walmart (NYSE: WMT) stock tumbled 6.5% on Thursday despite the company delivering phenomenal results for the fourth quarter and full year of fiscal 2025, ended Jan. 31, 2025.

Walmart is coming off of a monster gain of topping 70% in fiscal 2024 -- a year in which it was the second best-performing stock in the Dow Jones Industrial Average (behind only Nvidia). So, the pressure is on for the company to justify the run-up with improving fundamentals.

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Here's why Walmart is at the top of its game, why its long-term investments are paying off, how it is executing in key areas, and whether the dividend stock is a buy now.

Image source: Getty Images.

A slight slowdown

Walmart's fiscal 2025 results were excellent, so the stock probably sold off due to guidance for fiscal 2026.

On a constant currency (CC) basis, Walmart expects net sales growth of 3% to 4% in fiscal 2026, adjusted operating income growth of 3.5% to 5.5%, and adjusted earnings per share of $2.50 to $2.60.

Walmart is still growing operating income faster than sales, which should lead to higher margins. But the guidance marks a slowdown from the 5.6% CC revenue growth and 9.7% CC operating income growth Walmart achieved in fiscal 2025.

Given Walmart's recent stock price of $97.21 per share, Walmart has a forward price-to-earnings ratio of 38.1 -- which is sky-high for a traditionally stodgy consumer staples company. Especially given that growth is slowing.

Walmart is executing where it matters most

Walmart stock may have run up too far too fast in 2024. But it would be a mistake to overlook the company's accomplishments -- especially regarding its investments and growth in e-commerce.

In fiscal 2025, Walmart's return on investment (ROI) was 15.5% -- the highest level since 2016. Its capital expenditures (capex) ballooned to $23.8 billion. As you can see in the chart, Walmart's capex has been soaring in recent years. Moreover, the high ROI suggests that those investments have been paying off.

WMT Capital Expenditures (TTM) data by YCharts

Walmart has been investing in new stores, existing store renovations, automation efforts, the build-out of its e-commerce program, a highly sophisticated advertising platform, supply chain improvements, and more.

Arguably, the biggest reason why Walmart's stock has been on such a tear in recent years is that Wall Street is rewarding Walmart for its investments paying off. Walmart CFO John Rainey said the following on the fourth-quarter earnings call:

We're fortunate to be a 63-year-old company that has the type of opportunities to invest in itself and drive the returns that we see. I've mentioned supply chain automation as one example, but there are many, but these are returns that are approaching 20% in some cases. The standard that we're holding ourselves to is that we want to see our ROI go up every single year. And we've seen that result over the last couple years. And so I'd hope that we'd be able to get to historical highs over some period of time. But we want to continue to see these investments pay off with our ROI going up.

In sum, Walmart isn't just throwing money at projects and hoping they work out. It is highly focused on putting capital to work in profitable efforts.

Walmart is now a major player in e-commerce

In addition to improving stores and its internal processes, e-commerce has been a standout for Walmart recently. Walmart's e-commerce business now makes up 18% of total sales compared to just 7% five years ago.

And best of all, e-commerce incremental margins for the quarter were 11%, or around twice the margins of the broader business. So Walmart is growing its high-margin e-commerce business at a rapid rate, which is a game changer for the retail giant.

In the recent quarter, Walmart's e-commerce sales in the U.S. grew 20% compared to 4.6% overall comparable sales growth.

Demand is driving e-commerce growth, but so are Walmart's long-term investments in its delivery fulfillment capabilities, as well as the company's newfound focus on value and convenience (not just value). Rainey said the following on the recent earnings call:

During the quarter, we expanded our store fulfilled delivery catchment areas to now reach 93% of U.S. households with same-day delivery. The popularity of expedited delivery has resulted in more than 30% of orders coming from customers and members that elected to pay a convenience fee to receive their scheduled delivery in less than 1 hour or less than 3 hours. We're also encouraged by the initial response to our launch of same-day pharmacy delivery. We're the first to integrate pharmacy, general merchandise and grocery in a single online order and have gained new pharmacy customers with this service.

In sum, customers are leaning into the value and convenience that Walmart provides with its rapid delivery network. The ability to bundle household staples and discretionary goods with grocery and pharmacy makes Walmart far more competitive with other leading e-commerce platforms (like Amazon).

Accelerating dividend growth

In its quarterly earnings release, Walmart announced a whopping 13% increase to its dividend, the largest raise in more than a decade. The monster increase is a curtain call for Walmart's 9% raise in February 2024.

The dividend boost marks Walmart's 52nd consecutive year of upping its annual payout -- ensuring it remains a member of the coveted list of Dividend Kings. But because the stock price surged so much last year, Walmart's forward yield is still just 1%. That's below the S&P 500 average of 1.2% and far lower than other Dividend Kings in the consumer staples sector, like Procter & Gamble (2.4% yield), Coca-Cola (2.8% yield), and PepsiCo (3.7% yield).

Walmart may not be worth its ultra-premium price

Walmart's premium valuation and low yield make it a poor choice for value and income investors. However, the company has taken market share from the competition even during a challenging period in the business cycle. Renovations are driving in-store traffic, and the e-commerce business is exploding.

Walmart is living up to its new mantra of value and convenience, so the stock could still be worth buying for investors willing to pay for a quality company. However, given the weak growth forecast for the upcoming fiscal year, investors should recognize it could take time for Walmart to grow into its valuation.

Walmart stock is only worth buying if you have the conviction that the company can continue growing operating income faster than revenue by sustaining a high ROI. If not, it may be better to keep Walmart on a watch list until its valuation becomes more reasonable.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Nvidia, and Walmart. The Motley Fool has a disclosure policy.