Shareholders in Woolworths Limited (ASX: WOW) had a rough start to 2015 with the supermarket giant's share price falling 5.4% so far.
To make matters worse, with a 9.7% gain in the S&P/ASX200 (ASX: XJO) (Index: AXJO) over the same period, Woolworths shares have underperformed the market by over 15% year to date.
As savvy long-term investors know the best sharemarket returns are made by those willing to buy stocks in quality companies during times of heightened uncertainty and share price volatility.
Indeed, investor sentiment towards Woolies has clearly soured in recent months with some financial commentators highlighting its price war with Coles – owned by Wesfarmers Ltd (ASX: WES) – as the catalyst.
Others have said it's not yet profitable Masters home improvement business is a significant concern.
Many also say its underperformance is a result of the threat from an expansion of foreign rivals Aldi and Costco.
Whatever it is, it appears to have been overdone with shares in our most profitable supermarket chain trading at a significant discount to the market.
Here are three reasons why now could be a great time to buy Woolworths shares.
- Having fallen 19% in the past year, Woolworths shares are now in a more compelling valuation range.
- In the year ahead, Woolworths is tipped to pay a fully franked dividend equivalent to a yield of 4.8%, or 6.9% grossed-up.
- Defensive earnings. During even the toughest economic times, people will still buy their non-discretionary items (things like milk, bread and so on) from Woolworths supermarkets. This affords the company a defensive earnings base which in turn helps support sustainable earnings and dividends per share growth.
Moreover, in the current low interest rate environment, Woolworths stands apart from fellow ASX-listed blue chip stocks like the big four banks, Wesfarmers and Telstra Corporation Ltd (ASX: TLS) because its shares trade at a discount to the broader market.
Whilst investors may be concerned over a number of scenarios which may or may not materially change Woolworths' earnings over the long-term, it's important to remember the value of an asset (in this case Woolies shares) is a product of its ability to generate free cash flow.
