Walmart (NYSE: WMT) is up more than 21% year to date and is now the second-best-performing component of the Dow Jones Industrial Average in 2024, behind only American Express.

Walmart’s outperformance may come as a bit of a surprise given the mega-cap growth stock rally has driven the bulk of the market’s gains over the last year-and-a-half or so. But Walmart’s results have been excellent, especially given consumer spending challenges.

On May 16, Walmart became the first Dividend King to surpass a $500 billion market cap. A Dividend King is a company that has paid and raised its dividend for at least 50 consecutive years.

Here’s why Walmart remains a safe stock worth considering even after its torrid run.

Image source: Getty Images.

A blowout quarter

Walmart had a very strong quarter. Compared to Q1 fiscal 2024, Q1 fiscal 2025 sales grew 6%, and adjusted operating income grew 13.7%. Adjusted earnings per share (EPS) soared 22.4%, and Walmart updated its full-year fiscal 2025 guidance.

Its prior guidance called for $2.23 to $2.37 in adjusted EPS, a 3% to 4% increase in consolidated net sales, and a 4% to 6% increase in consolidated adjusted operating income. The company now expects to achieve the “high-end or slightly above original guidance” in all three categories.

“Q1 results exceeded our expectations for both sales and operating income growth. And while it might be a little much to expect every quarter to be this good, we feel really good about the performance, and it demonstrates how this business can perform when we’re firing on all cylinders,” said John Rainey, CFO of Walmart, on the recent earnings call.

If Walmart achieves the high end of its fiscal EPS guidance, it would have a 27.4 price-to-earnings ratio. That isn’t inexpensive, but it’s not terribly high considering the tear that Walmart stock has been on.

It’s worth mentioning that Walmart isn’t without its challenges. U.S. health and wellness sales grew by high single digits and grocery sales grew by mid-single digits, but general merchandise (non-grocery staples and discretionary goods) fell by low single digits. Therefore, Walmart’s strong quarter isn’t indicative of a strong consumer, but rather the strength of Walmart’s diversified business and value-orientated approach. It’s also a red flag for more discretionary-focused retailers.

Growth drivers

The buy case for Walmart centers more around where the company is headed than where it has been. Walmart has made noticeable strides in branching out from in-store shopping.

Walmart+, launched in 2020, is a subscription for free home delivery. It continues to grow by double digits. Store-fulfilled pickup, delivery marketplace, and advertising helped fuel 22% growth in Walmart’s e-commerce business.

Walmart has made a commitment to customers to provide them with affordable options. The big strategic shift for Walmart in recent years is expanding the value proposition to focus on not just price but also convenience. That’s where home delivery and curbside pickup come into play.

I can say from personal experience that Walmart+ is a very well-run program. The big draw is $0 delivery fees and $0 shipping on orders of $35 or more. It can save a ton of time, especially for a big order. And it’s easy to get a little carried away when the entire Walmart store is at your fingertips.

Walmart is essentially taking a page from Costco Wholesale and Amazon. A base-level Costco membership is $60, while Amazon Prime is $139 per year. Costco makes over half of its operating income from membership fees alone — but it’s mandatory to be a member, so that’s a core part of the business model. Still, the impact of a relatively small annual fee on Costco’s profitability is noticeable. If Walmart can grow sales and earn high-margin subscription revenue by increasing delivery volumes, it could be a major long-term growth driver for the company.

Walmart+ provides a lot of value for folks who shop for their groceries and other goods at Walmart. Amazon Fresh simply doesn’t hold a candle to Walmart in the grocery business, as Walmart provides much better value. And with Walmart’s value bent, it can compete with Amazon in the non-perishable categories too.

“We’re investing in areas that have strong capital returns like automation, store remodels, and digital tools and technologies,” Rainey said on the call. “Combined, these investments are widening our competitive advantages, providing us levers to also invest in people and price while achieving our sales and margin objectives.”

Walmart’s brand is all about value through low prices. The key is maintaining that same perception through different outlets, such as home delivery and curbside pickup.

Expect more dividend hikes

Walmart has overcome bloated inventory and supply chain challenges and is now growing its top and bottom lines at a good pace. The growth is helping Walmart justify its recent 9% dividend raise — the highest in a decade. However, even when factoring in the raise, Walmart yields just 1.4%.

The good news is that there is plenty of room to grow the dividend, and I expect we’ll see similar-sized raises from Walmart going forward to help boost the yield. Its updated EPS projection and the new dividend — Walmart would be paying $0.83 per share in dividends but earning $2.37 per share — imply that its stock will have a payout ratio of just 35%. That’s very low for a steady value-orientated retailer. A range of 50% to 75% would be considered healthy for a company like Walmart. If the payout ratio were already high, then Walmart would be unwise to grow its dividend faster than earnings growth.

Walmart is still a buy

Walmart deserves its premium valuation because the business is driving traffic, growing margins, and increasing its reach through home delivery. The guidance is an encouraging sign that Walmart is navigating consumer spending challenges well. Thanks to Walmart’s low payout ratio, the dividend is positioned to grow at a faster rate than earnings.

Walmart is at the top of its game and showing no signs of slowing, making it a foundational holding for investors who believe that the company is making the right long-term investments to capture growth.

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American Express is an advertising partner of The Ascent, a Motley Fool company. 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, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.