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Shopping for shares? Add Woolworths to your list

As one of Australia and New Zealand’s largest retailers, Woolworths (ASX: WOW) offers investors a broad exposure to consumption spending in both countries. Having released an impressive set of full-year results and provided guidance for growth in the current financial year, here are four reasons to consider adding Woolworths to your watch list.

Defensive and predictable

Woolworths’ businesses include its namesake supermarket chain, liquor stores and petrol stations, discount department store Big W and a hotel division. These businesses all offer defensive and reasonably predictable streams of earnings to shareholders. Indeed the growth in earnings last financial year (FY) was in the double digits, which is an incredible return given the defensive nature of those earnings and particularly given the state of the economy over FY 2013.

FY 2013 earnings before interest and tax (EBIT) before costs associated with the newly launched Home Improvement division grew by 10.1% with guidance from management of a 4% to 7% increase in net profit after tax in FY 2014.

Strategic moves

While arguably it looks like private equity firm Anchorage Capital Partners got the better end of the deal from Woolworths’ decision to divest its electronics retail chain Dick Smith, it is true that the mature business has suffered from significant price deflation, competition both from JB Hi-Fi (ASX: JBH) and online sellers and was perhaps not best suited to ownership under Woolworths.

In comparison the $42 billion home improvement market that is currently dominated by Wesfarmers’ (ASX: WES) Bunnings — with an approximate 16% share of a market — offers significant growth potential for Woolworths via its newly created Masters retail chain.

Innovation

Like all businesses, Woolworths continues to innovate and advertise to stay relevant and maintain market position. Recently this has included the roll out of online sales options such as click-and-collect and home delivery services. Online has also played an important part in the firm’s expansion into channels where it can utilise its brand strength and customer base to cross-sell products such as insurance and mobile phone plans.

Dividends

Woolworths has an impressive history of paying increased dividends year on year. Between FY 2009 and FY 2013 the dividend has increased from 104 cents per share (cps) to 133 cps. At its current share price of $34.70, this implies an historical dividend yield of 3.8% however shareholders could expect the forward dividend yield to be higher than this.

Foolish takeaway

While the share price of Woolworths would look to have much of the positive outlook for the company factored in, the recent uptick in consumer sentiment is an added tailwind to the four reasons considered above. Long-term investors looking for a high quality company with a maintainable dividend may certainly want to consider adding Woolworths to their watchlist.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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