The recent underperformance of Woolworths Limited (ASX: WOW) shares has been well documented.
Indeed, those who fear the growth of foreign giants such as Aldi and Costco will likely say the entire supermarket sector is now 'ex-growth'.
Metcash Limited (ASX: MTS), which owns IGA and Foodworks, was the first to succumb to the market's wrath. Perhaps investors felt its smaller – higher-cost – stores would be more vulnerable to Aldi's discount and 'convenient' growth model. Metcash shares have fallen 60% over the past year.
Next in line was Woolworths, which is still Australia's largest grocery retailer in terms of sales. It is also the most profitable. Its shares are down 23% in just 12 months.
Wesfarmers has weathered the storm best – falling 5% – but it remains to be seen how long it can continue to trade at a valuation premium to the market, and its peers.
3 reasons to watch Woolworths' shares closely
- Dividend. The fall in share price has worked wonders for its dividend yield, which is calculated as dividend per share divided by share price. Forecast to pay two dividends equal to $1.39 over the coming 12 months, Woolworths' shares will likely yield 4.99% fully franked based on yesterday's closing price.
- Valuation. Woolworths' shares may not be a standout bargain at today's prices, sure, but it's not drastically overvalued either. In fact, I'd say Woolworths is around fair value today. So if you want to get a bargain, keep it on your watchlist just in case prices fall meaningfully lower.
- Growth The media has scrutinised Woolworths' decision to start Masters and compete with Wesfarmers' Bunnings Warehouse. Along with Home Timber and Hardware, Masters makes up Woolworths' Home Improvement business. The business lost a fair amount of money last year ($170 million), however, the market for DYI construction is already huge, and growing. If Woolworths can stabilise its grocery earnings, and resurrect the outlook for its Masters business, it'll certainly be one to watch closely…
