Socially responsible investing is akin to a Rorschach inkblot: It’s in the eye of the beholder.
In my eye, most everyone gets socially responsible investing wrong. They conflate it with something new-age, putatively environmentally friendly, healthful and mostly unprofitable.
I view the world differently. A socially responsible investment generates profits by satisfying consumer wants as efficiently as possible. A socially responsible investment also generates high returns and income for investors. It accomplishes both by delivering goods and services in a relatively unhampered market.
Based on my criteria, Wal-Mart (NYSE: WMT) just might be the most socially responsible investment on earth.
Few, if any companies, satisfy consumer demand as well as this blue chip stock. Its annual revenue approaches $500 billion annually. No company comes close to generating revenue to the extent Wal-Mart does.
Being a private sector company, Wal-Mart can generate revenue only one way – by satisfying consumer demands. The fact that consumers willingly exchange nearly $500 billion annually for Wal-Mart’s goods and services speaks volumes to its ability to satisfy consumer demands.
What’s more, Wal-Mart continually satisfies demand by continually driving prices lower, thus raising the living standard of their customers. Wal-Mart survives on razor-thin margins. Operating margins are 5.6%; net income margins are 3.4%. Apple (NASDAQ: AAPL) sports operating margins and net income margins of 28.7% and 22.3%, respectively.
You would be hard pressed to label Wal-Mart a price-gouger (which is a fiction anyway). Nevertheless, its expansion plans are frequent targets of know-nothing protesters. I’ve yet to see anyone protest a proposed Apple Store, yet its margins are six times Wal-Mart’s.
As investors, we obviously want to satisfy consumer demand, but only if we do so profitably. Profits are the only quantifiable measure of value creation.
Here again, Wal-Mart excels. Though it earns little on each sale, it’s still able to generate $16.3 billion in annual income, or $5.05 a share. This is nearly double the earnings of a decade ago. By continually improving efficiency – through sales growth, increased inventory turnover and waste reduction – Wal-Mart forces the needle forward.
Earnings growth is the wellspring for dividend growth and price appreciation. Wal-Mart’s annual dividend has grown to $1.96 a share from $0.60 a decade ago. Over the same period, the share price has nearly doubled to $80 a share from $46.
This isn’t Apple-esque growth by any measure, but it’s solid, dependable growth income investors can bank. Annual dividend increases drive share price appreciation and raise cost basis yield. A share of Wal-Mart that yielded 1.3% in 2006 yields 4.3% today.
Unlike Apple, though, Wal-Mart has to endure an unparallelled level of nonsense. Detractors argue that Wal-Mart bankrupts mom-and-pop businesses. They’re misguided, flat-out wrong, and insufferable bores to boot.
If mom and pop are sufficiently delusional to compete with Wal-Mart to sell Tide and toilet paper, then mom and pop deserve to have their heads handed to them. Most mom-and-pop businesses are rational. They don’t compete with Wal-Mart; they open ancillary businesses instead. They actually welcome Wal-Mart for the traffic it attracts.
As for the other nonsensical detraction, wages, Wal-Mart has no more moral obligation to pay wages above the market clearing price than you or I. If they regularly paid wages above the market clearing price, then investors – the owners – should revolt, because the company is incurring an unnecessary cost. If you can find reliable people to mow your lawn for $50 a clip, you don’t offer $60.
Most of all, Wal-Mart is socially responsible because it runs a viable business model independent of government largesse. Unlike other “socially responsible” businesses – solar power, electric cars, ethanol – Wal-Mart doesn’t pickpocket its fellow citizens through subsidies and privileges in order to survive. This is opposed to the sacrosanct Tesla Motors (NASDAQ: TSLA), which would wither in short order if plucked from its government teat.
When the socially responsible merits are aggregated, it’s impossible not to see Wal-Mart as a socially responsible investment.
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