Competition in the Australian supermarket space is heating up.
Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES), which control more than 70% of the market combined; are facing off with growing international rivals.
Costco and Aldi are both muscling in on the incumbents. However, so far, the tough competition is only being reflected in shares of Woolworths – Australia's largest and most profitable supermarket operator.
Indeed, shares of the supermarket giant have underperformed the broader S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by 20% in the past year. While this may ordinarily be a cause for concern, I think there are reasons to keep a close watch on the shares.
Here are two reasons all investors should watch Woolies closely.
- Dividends. Woolworths' share price is lower year-over-year, which means, all else being equal, its dividend yield is much higher. At today's prices, Woolworths' fully franked dividend yield is forecast at 5.1%, according to data from Morningstar.
- Potential for a rebound. Warren Buffett famously quipped, "turnarounds seldom turn". However, he's famous (and rich!) for buying quality proven businesses at great prices. While I'm not suggesting he'd buy Woolworths shares if he was investing on the ASX, I am suggesting he'd at least take a second look at it now that it's 20% cheaper.
Foolish takeaway
Value investing requires investors to see through the 'noise' in the market and focus on the underlying value of the business over the long term. Previously, I said Woolworths' shares are worth around $28. However, I'm waiting for the appointment of a CEO to replace the outgoing Grant O'Brien before buying more shares.
