This Is Why Amazon Is Dominating Walmart Now

A few years ago, Walmart was the undisputed ruler of retail. Its $444 billion in revenue in 2012 was 16 times the revenue of Amazon and equal to 3% of the U.S. economy. It was the third-most valuable American company and the most valuable retailer by a wide margin.

But then a new narrative began to appear. As online retail growth surpassed that of Walmart’s traditional retail model, a rivalry emerged between Walmart and Amazon, as price wars broke out. Today, Walmart’s revenue is still much larger–although only 5 times larger now–and Amazon’s revenue per employee ($623,000) is nearly three times that of Walmart.

More noticeably, Amazon’s market cap this summer surpassed that of Walmart’s. Amazon is currently valued at $244 billion to its rival’s $206 billion. As much as that news was seen as evidence of Amazon’s unstoppable rise, it had just as much if not more to do with a slow decline Walmart has been trapped in.

After reaching an all-time peak of $90 a share in January, Walmart’s stock has slumped 30% to close at $64 a share Thursday. And as visible as the rivalry is between these two retail giants, their stocks, viewed from an investment standpoint, are very different stocks.

It’s not just that Amazon is soaring this year while Walmart is sinking. It’s that one of them is a prized growth company and the other an aging, struggling giant that is paying billions a year in dividends to keep investors from selling. Put in retail terms, Amazon is the high-end product that people are willing to pay a crazy premium for, while Walmart is now something you might find in the bargain bin.

After growing for decades, Walmart’s revenue and net income have both flatlined or even declined in recent years. Once accustomed to double-digit annual growth, Walmart’s revenue in the past 12 months totaled $485.6 billion, up a mere 2.8% over the past two years. Net income over the past 12 months totaled $15.5 billion, down 8.8% from two years earlier.

Amazon, too, has at times elicited shareholder complaints about its net income, but it’s widely known Amazon plows potential profits back into its future growth. With revenue steadily growing around 20% a year, most shareholders are more than content with that approach. Besides, when concerns mounted this year about aggressive spending, the company showed it could ease off the gas pedal to moderate its capital investments.

What Amazon doesn’t do is spend billions of dollars a year on share buybacks. And it’s never offered a dividend. Where Amazon is putting what it can into future growth, Walmart returns billions in capital each year to shareholders. In June 2013, Walmart’s board authorized a $15 billion stock buyback program. After a little more than two years, it’s already spent $6 billion, according to SEC filings.

On top of that, Walmart is paying out about $6 billion a year in dividends. Factor in buybacks, and the company is returning about $9 billion a year to shareholders. And even then, shareholders have been driving down its stock price. Walmart has a dividend yield equal to more than 3% of its current stock price. That makes it attractive for value investors–which is a Wall Street term for bargain hunters.

Much of this selling has been tied to a sense that Walmart is facing long-term problems. The company raised its entry wage to $9 an hour in April with plans to have all associate paid at least $10 an hour next February. This is long overdue and could help Walmart by reducing turnover, improving service and avoiding training new workers. But it’s pressuring profit margins in the near term.

Walmart has also been trying to retool the way employees interact with customers inside the store, opening “Neighborhood Markets” a fifth the size of its supercenters, and integrating its online and offline sales as part of an ambitious turnaround plan. Like many turnaround efforts, Walmart’s could take years to complete and my involve more investing up front before the benefits become evident.

In the meantime, Amazon continues to push into new areas to counter the slowing growth of its own core retail site. Walmart’s efforts to reignite growth seem like reactions to problems it’s seeing today. Amazon’s investments in the cloud and video markets seem aimed at crating markets that will be growing a few years from now. Matters of perception perhaps, but not without consequences for both firms’ stock price.

Which may tell you all you need to know about the rivalry of these two big retailers. One is seen as a growth stock, the other as a value play that might be recovering in a couple of years. One is investing in new ambitious projects, the other in steady payouts to today’s shareholders. And of course, one has been rising while the other has been declining in recent months. From an investment standpoint, these are two very different ventures.