The share price of Woolworths Limited (ASX:WOW) is still down around 25% from where it was 12 months ago despite the stock bouncing back to $23 from its decade low level of $20.50.
While some investors appear to have written Woolworths off and are treating it as though it's not even blue-chip anymore, there are reasons to consider this an enticing contrarian opportunity…
1. Great track record – While the past performance of a stock is no guarantee of the future, the fact that Woolworths has produced a total shareholder return of 6.1% per annum (pa) over the past decade despite its recent troubles is worth remembering.
For context, other blue chips such as Wesfarmers Ltd (ASX: WES) and National Australia Bank Ltd. (ASX: NAB) have achieved ten-year TSRs of 7.6% pa and 3.1% pa respectively.
2. Still the leading supermarket – Despite renewed competition from Coles and the entrance of new competitors including Aldi and Costco, it's worth remembering that Woolworths still operates the largest supermarket chain in Australia.
This position provides scale advantages for the group which amongst other things gives Woolworths buying power to negotiate better terms with suppliers.
3. Management focused on the core once again – Given the resounding success of Bunnings it is understandable that Woolworths' management and board took a deep look at entering the hardware market.
While there will be plenty of case studies done on what went wrong with the execution of their plans, the simple fact is that now the distraction is gone.
4. Big W has potential – With revenues of $2.3 billion but earnings of just $67 million reported for the six months to December, the general merchandise division achieved an operating margin of just 3% and a return on average funds employed of only 6.4%.
Peer comparisons with Target and Kmart – owned by Wesfarmers – would suggest room for improvement at Big W.
5. Dividends – Woolworths has in the past been a "go-to" stock for income-seeking investors, particularly self-managed super funds (SMSF) who viewed the stock as paying a dependable dividend. With the board slashing the recent interim dividend from 67 cents per share (cps) to 44 cps that expectation has now been shattered.
With expectations reset, based on current analyst consensus for financial year (FY) 2017 – for which an even lower dividend than FY 2016 is expected – the forecast yield remains a respectable, fully franked 4.1%.
