Add the WOW factor to your investment portfolio. Why I think the Woolworths share price is a buy

Amid the COVID-19-induced market turbulence, here's why I think smart investors should be looking to resilient shares such as Woolworths Group Ltd (ASX: WOW).

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Globally equity markets have seen a return to volatility as COVID-19 takes centre stage again. Lately, equity markets had seemed to factor in that the worst of the pandemic was behind us. The possibility of a second wave was always discussed by both health professionals and governments, but was evidently not priced into the equity market valuations.

With a resurgence in infection numbers in locations like Beijing and the United States (US), talk of a second wave has intensified and spooked equity markets. This comes at a time when the World Health Organization has stated that the first wave is yet to peak in certain regions like South America. So, it increasingly looks like that, until a vaccine comes out, the world will have to live with the active infections for longer than anticipated. The great influenza of 1917 that started in the US saw multiple waves – many health professionals and historians believe that COVID-19 could also unfold in a similar pattern.

For investors like us, this means share markets will likely rise and fall in line with the COVID-19 waves. Smart investors should be looking for resilient shares that can outperform the broader market – even during times of global uncertainty. In my opinion, one such share is Woolworths Group Ltd (ASX: WOW).

How has Woolworths performed recently?

Over the last year, Woolworths shares have generated a return of 9.10% while the S&P/ASX 200 Index (ASX: XJO) has seen a negative return of 11.50%. An outperformance of more than 20% in a year during turbulent times like this can add a lot of resilience to your ASX investment portfolio. And considering its industry and business model, Woolworths shares have the potential to continue to outperform, in my view.

Even as other industries suffer because of a slowdown in the economy and lower disposable incomes, Woolworths should continue to see largely stable revenues as much of its operations are in sectors that cater to consumers' daily necessities. It is largely discretionary items like holidays that suffer the most when disposable incomes decline. Woolworths does have exposure to this segment through its hotels business, but overall its other consumer retail sectors should keep the ship stable and sailing ahead.

This optimism is also reflected in the company's plans to invest in supply chain transformation. On 23 June, Woolworths announced it will be developing an automated regional distribution centre and a semi-automated national distribution centre at Moorebank Logistics Park in Sydney. The company expects construction to be completed by the end of 2023, and expects to realise initial benefits from the new distribution centres in financial year 2025.

The 2 sites are expected to materially increase Woolworths' supply chain capacity and improve its efficiency. The company plans to invest around $700–$780 million in setting up these facilities – an investment it expects will result in a significant reduction in its supply chain costs over time.

During the first half of FY2020, Woolworths' Australian food business saw a growth of 6.4% over the corresponding period last year. Its New Zealand food business growth stood at 4.8% for the same period, while its BIG W and Endeavour drinks business grew by 2.8% and 4.7%, respectively.

When most companies are showing sharp declines in absolute revenue numbers during the same period, it's pleasing to see that Woolworths has delivered positive growth numbers. However, given the steady demand for its products, there could be a potential concern around how fast Woolworths can replenish its inventory, in the light of global supply chain disruptions. This is something to watch out for in the near future.

In its most recent trading update, Woolworths also reported that hotels have begun to reopen as lockdown restrictions ease, but noted that around two-thirds of its venues are in Victoria and Queensland where operating conditions remain restricted, particularly for gaming. The company stated that, as a result, "sales remain materially below prior year levels and the Hotels business is expected to continue to be loss-making until more venues operate with a full-service offer."

Are Woolworths shares a good long-term investment?

I believe Woolworths is very well positioned to weather the COVID-19 storm, even if the pandemic unfolds in multiple waves. Its business operations (except for hotels) should be able to remain stable and even grow their revenues. With Woolworths investing in improving its supply chain efficiencies, more of those revenues would flow to the bottom line.

With a price-to-earnings ratio of 18.13 times and dividend yield of 2.83%, I believe Woolworths shares are an attractive investment opportunity. The Woolworths share price currently sitting at $36.43 per share, putting its market cap at $46.01 billion.

Motley Fool contributor Arpan Ranka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

Three people in a corporate office pour over a tablet, ready to invest.
Broker Notes

Top brokers name 3 ASX shares to buy today

Here's what brokers are recommending as buys this week.

Read more »

Senior man wearing glasses and a leather jacket works on his laptop in a cafe.
Broker Notes

Should I still swap my CSL for CBA shares or has the market corrected?

The two stocks have travelled opposite directions this month.

Read more »

Man with rocket wings which have flames coming out of them.
Resources Shares

Why Macquarie expects this ASX All Ords copper stock could surge 38%

With costs coming in below expectations, this ASX All Ords copper stock could rocket higher over the coming months.

Read more »

woman holding 'hiring' sign in shop
Broker Notes

Can you guess whether Macquarie prefers REA Group, CAR Group or SEEK shares?

Which ASX online classifieds business offers the best investment opportunity today?

Read more »

An ASX shares broker analysing a chart tracking the A2 Milk share price
Share Market News

Are these two struggling ASX materials shares undervalued?

Are these buy-low candidates?

Read more »

Female miner smiling in front of a mining vehicle as the Pilbara Minerals share price rises
Broker Notes

Expert says this ASX All Ords small cap mining stock could rocket 38%

Big upside ahead?

Read more »

Happy man working on his laptop.
Share Market News

5 things to watch on the ASX 200 on Wednesday

It looks set to be another good session for Aussie investors tdaoy.

Read more »

Two laughing young women hold shopping bags and ride an escalator up to another level in a Scentre Group shopping centre.
Broker Notes

3 ASX consumer sector shares to buy in July: expert

A leading expert has named its top 3 picks.

Read more »