Woolworths Group Ltd (ASX: WOW) provides food, general merchandise and specialty retailing through chain store operations. Since June 2008, Woolworths has rewarded shareholders with 26% capital growth and returning $11.72 per share in fully franked dividends.
If you bought Woolworths 10 years ago and reinvested all of the dividends, your initial investment would be approximately 60% larger which is a shade under 5% annualised returns. This is relatively disappointing and suggests that the company has been irresponsible with retained profits.
At 30 June 2008, Woolworths had a book value of $4.95 per share. Since then, the company has retained profits of $6.23 whilst only improving book value by $2.44 per share. Additionally, Woolworths has experienced stagnant sales growth with net profit declining in the last 5 years.
Currently, Woolworths has a market capital of $37.9 billion and a price-to-earings (PE) ratio of 23. Comparatively high, the P/E ratio indicates that the market is expecting growth from this long-time blue-chip stock.
Brokers are expecting the company to return $1.44 in earnings per share and $0.99 in dividends by 2020. If you purchased Woolworths on today's price, that would secure you a dividend yield of 3.40% and a forward P/E ratio of 20.2
Woolworths does not appear to present any significant value for investors. So why is the share price near a 52 week high?
Defensive Investing
With all the talk about imminent share market corrections and housing bubbles, some investors are positioning themselves in long-term defensive shares. A defensive share is one that provides a constant dividend and reliable earnings regardless of share market sentiment or house price falls.
Food and drink is arguably the last thing people will cross off their budgets and this accounts for more than 100% of Woolworths profits (due to the losses from Big W). However, Woolworths has a debt to equity ratio of 0.32:1 compared to Wesfarmers Ltd (ASX: WES) 0.23:1 and Aldi who famously prefers to expand out of profits with zero debt.
Investors should take note of this comparison as when things get tough, Woolworths is poorly positioned to compete via cutting prices compared to its competitors.
Foolish takeaway
Ultimately, historical performance and the premium built in to the current price is enough to avoid this stock. Furthermore, Woolworths is poorly positioned to compete with other supermarket powers in a down market. As such, I would rate Woolworths as a sell.
