This week’s top blue-chip buy: Woolworths Limited

Woolworths Limited (ASX: WOW) recently reported a 6% increase in sales and a 6% increase in net profit after tax (both before significant items) for the half year ending 31 December 2013. At the per share level, the company experienced growth in EPS of 4.9% to 106.1 cents per share (cps) and the board declared a 4.8% increase in the interim dividend to 65 cps.

These are incredibly solid growth numbers for a business as large as Woolworths – the group had sales of nearly $32 billion during the half. Importantly the growth is set to continue with management revising its expected growth in full year NPAT up to a range of 5% to 7%.

While there are a number of stocks which attract the ‘blue-chip’ tag, Woolworths in many ways epitomises a ‘blue-chip’ stock.


When it comes to the quality of Woolworths’ operations, the firm is almost without peer. The retailer regularly scores amongst the very top leading retailers globally when compared on gross margins, cost of doing business and returns on capital.


As Australia’s largest retailer and operating not just in supermarkets, but petrol, liquor, hotels and discount department stores as well, Woolworths counts an incredibly large percentage of the population as its customer base. This is very appealing from a shareholder’s point-of-view, as unlike contracting firms such as Lend Lease Group (ASX: LLC) which must juggle the risks of exposure to large, complex projects, Woolworths isn’t exposed to any single customer or transaction but rather millions of small ones.

Growth strategy

Despite the crowd of naysayers, how can it not make sense for Woolworths to develop a home improvement offering?  Wesfarmers Ltd (ASX: WES) has obviously built a fabulous business under the Bunnings banner and enjoys salivating margins and returns on capital from the Bunnings business.

As Australia’s largest retailer and with skills in supply chain management and retailing it makes perfect sense that Woolworths has decided to compete in this market segment and there is little reason at this early stage to suggest that it won’t ultimately develop a compelling offering and earn a respectable return on its investment in the Masters Home Improvement business.

Dividend yield

According to one consensus of analysts, Woolworths is forecast to pay $1.48 in dividends in FY 2015. This implies a forward dividend yield of 4.1% which is appealing given the level of certainty and sustainability investors can expect.

Foolish takeaway

With the stock trading on a forward price-to-earnings (PE) ratio of 17.45x, Woolworths is certainly no screaming bargain. However given its high quality and only small premium to the S&P/ASX 100 Industrials (ex-financials) PE of 16.6x, this blue-chip could be one for your shopping cart.

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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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