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Should you buy Woolworths Limited in 2014?

Woolworths Limited  (ASX: WOW) is hardly a company that needs an introduction to investors; as Australia’s largest retailer with a market capitalisation of $42 billion and as a leading blue chip company it is certainly on the radar of most investors. Because of its high profile, it can be hard to find an opportunity to purchase Woolworths at an appealing price, however most companies at some point do go “on sale.”

As was the case with many stocks, the period between 2008 and 2009 when the global financial crisis (GFC) was in full swing was one such opportunity. Despite the defensive, maintainable and predictable earnings Woolworths provides, the stock price still plunged from a high around $34.60 to about $23.40 – a fall of 32% – creating a wonderful opportunity for investors to buy. The stock price has subsequently rallied around 44% since its GFC lows.

FY 2013 review

In financial year (FY) 2013 Woolworths boosted underlying profits by an impressive 8% and dividends by 5.6% to 133 cents per share (cps). The prior sale of Dick Smith Holdings Ltd (ASX: DSH) removed the underperforming electronics division that had been distracting management and allowed the supermarket operator to focus on what it does best. This appeared to work with all remaining divisions boosting their earnings.

FY 2014 outlook

The general consensus was that the Christmas period for retailers was better than the previous corresponding period. While Woolworths is much less dependent on the December/ January trading period than most retailers, it does still bode well for the firm given management’s outlook for subdued retail conditions in FY 2014.

The market is perhaps a little more upbeat than management, with analyst consensus forecasts suggesting a 4.3% increase in earnings per share and a 5.3% increase in the dividend. Based on its current share price of $33.83, the implied forward fully franked dividend yield is 4.1%.

Foolish takeaway

While Wesfarmers Ltd (ASX: WES) and Metcash Limited (ASX: MTS) both offer exposure to the supermarket and consumer non-discretionary sector too, Woolworths’ business is uniquely positioned with revenue streams that are particularly defensive, maintainable and predictable.

With the stock trading on a forward price-to-earnings multiple of 17.3, Woolworths may not be too far from fair value given its high quality.

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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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