Over the past twelve months retail giant Woolworths Limited (ASX: WOW) has slipped about 10% down in share price. A weak Australian economy, increased competition and a subdued retail market has slowed the retailer.
Some investors may be starting to question its longer-term growth prospects, however I have five reasons why shareholders should hold onto their shares.
Cheaper petrol advantage
The recent collapse in world oil prices has sent a shudder through Australia's energy stocks, yet Woolworths may see two benefits from it. First, transportation of goods to Woolworths' stores every day requires great amounts of fuel. Lower petrol costs could reduce this expense and widen operating margins.
Secondly, like a government tax cut, consumers have more money left in their pockets after paying less for petrol. Daily shopping at Woolworths' supermarkets, general retail and liquor outlets could rise, increasing sales revenue. Every little bit helps.
Market leader with steady store growth
Woolworths is still one of the clear retail market leaders despite the increased presence of rivals like Aldi and Costco. For example, the Dan Murphy's store chain dominates the liquor outlet business.
The Masters DIY hardware stores are still being fine tuned to hopefully become profitable within several years. All the while the company is pushing ahead with an expansion in stores, which it needs to achieve a critical mass of business.
Healthy dividend yield and good track record for dividend increases
After hitting an all-time high of almost $39 a share in April 2014, the stock now stands at a little above $30, near 52-week lows. That has raised the dividend yield to an attractive 4.53% fully franked. Woolworths has raised its full year dividend every year for the past 10 years and currently is paying out about 70% of earnings to shareholders. That's steady income for investors' portfolios.
Stable earnings and reduced debt
Earnings growth may have slowed recently, but net profits are still trending up. In addition, Woolworths is paying down debt and net gearing stands at a very manageable 32%. The retailer maintains a high return on equity and capital, showing the skill of experienced management.
Long-term blue-chip income
Woolworths does have some challenges right now and forecast earnings growth is for about 3% annually over the next several years. That said, investors need to consider long-term dividend income and share price growth. The retailer may not be a fast grower, but it probably will be in business – and paying dividends – for decades to come.
Also, it may enter new markets like financial services (similar to large retailers in the US) in the near future, so there are still growth opportunities.
Woolworths is a solid, well managed business that shareholders should see themselves as part-owners in. Growing dividend income from this blue-chip over the years could be a very welcome addition to your portfolio wealth.
