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Woolworths shares: Better than a term deposit?

Every Australian knows Woolworths (ASX: WOW). No doubt some of you will be munching on something purchased from Woolies even as you read this.

Over the last ten years, Woolworths shares have risen nearly 175%, versus a 75% rise in the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO), as shown in the chart below.

WOW vs AXJO, last ten years

Nearly half a million Australian investors already own the shares (and even more through their super funds). But for investors thinking of adding to or starting a position in Woolworths today, a quick review of the numbers and the business is in order.

Woolworths by the numbers

Today, Woolworths operates over 1,000 supermarkets in Australia and New Zealand, 176 Big W stores, as well as some 600 petrol canopies, 25 Masters stores, nearly 1,400 liquor outlets, and over 300 hotels.

For the first half of 2013, group sales from continuing operations rose 4.8% to over $30 billion. Net profits after tax (excluding special items) grew by 5.5% to $1.2 billion.

Woolworths also enjoyed strong growth in online sales, with sales up 40% over first half 2012 levels. Its app has already been downloaded some 2 million times.

Looking forward — and valuation

There’s no doubt that Woolworths, with its incredible scale, strong brands, and retailing expertise, has sustainable competitive advantages. For the full year 2013, the company has guided to net profit after tax growth of between 4% and 6%, excluding special items.

Today, shares are trading for a shade under 20 times trailing earnings, or an EV to EBITDA ratio of 10.5. That’s a fairly premium valuation, overshadowing the fully franked nearly 4% dividend yield.

Foolish takeaway

Investors seeking income and a reasonable valuation versus growth prospects might do better than buying Woolworths shares today.

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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