MENU

How low will Woolworths go?

While the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) has fallen some 7% in the last 30 days, shares of Woolworths (ASX: WOW) have fallen nearly 10% over the same period – and savvy investors should be paying close attention in case of a further drop.

Valuation and defensive play

Today, Woolies’ shares are trading for 18 times earnings. But should the share price drop and this multiple compress further, this premier Australian company could enter cheaper – even “buy” — territory.

Woolworths isn’t just a premier Australian company, of course. With its business centered in consumer staples – groceries, beer – it could make an excellent holding in the event of a recession Down Under. While consumers might cut back their spending at, say, at a department store like David Jones (ASX: DJS), they’re not likely to stop buying milk, cheese and bread at Woolies.

Some analysts have expressed concern around Woolworths’ Masters chain of home improvement stores, yet the company has said this chain is on target to break even in 2015-2016.

And while nearly 100 Australian companies have issued earnings downgrades of late, even market darlings such as Cochlear (ASX: COH), there’s been no such news from Woolworths. The company has forecast net profit after tax growth of between 4% and 6% for the full year.

The bottom line for investors

Sure, you wouldn’t call this sort of profit growth spectacularly exciting – Woolworths is, on the whole, a mature business. But for stability and relative safety, it could be a good bet, at the right price. Woolworths shares also pay a fully franked dividend, with a yield in the 4% range.

Likewise, every Aussie investor knows Telstra, but only the smart money is on the move now… Discover whether you should buy, sell or hold Telstra shares in our brand-new report, written by a top Motley Fool analyst. It’s free, click here for your instant download!

More reading

Motley Fool contributor Catherine Baab-Muguira has no financial interest in any company mentioned in this article.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.