Motley Fool Australia

Kick Off: Woolworths Limited v Westfield Group

ASX world cup

Well they don’t get much bigger than this in the Motley Fool’s ASX World Cup! Today we have a blue-chip match-up between two enormous companies: the mighty Woolworths Limited (ASX: WOW) versus the globetrotting Westfield Group (ASX: WDC).

It’s going to make for interesting viewing as these two firms represent bright spots in an otherwise troubled retail industry. Woolworths and the domestic non-discretionary retail sector have largely been spared from the soft sales environment facing the discretionary retail sector, this has been helpful for Westfield too as often its malls are anchored by supermarkets. Westfield’s globally diversified property portfolio has also shielded it from the weak domestic retail scene.

Here are some important stats to consider before the game begins:

Woolworths Westfield
Market Capitalisation $44.8 billion $22.6 billion
Price-to-Earnings ratio (FY14) 18.4x 15.7x
Dividend Yield (FY14) 3.9% (fully franked) 4.8% (unfranked)
5-year TSR 10.7% 10.2%

From the outset this match-up is going to be a tough call for investors with both stocks being first-class, and having delivered double digit total shareholder returns (TSR) over the past five years. As leaders in their respective fields and run by able management teams, both stocks are appealing – it’s going to be tough to pick a winner.

When it comes to valuation it doesn’t get any easier either. After adjusting for franking credits, Woolworths’ yield is slightly more appealing. Its multiple is slightly higher but then so is the strength of its balance sheet, quality of its earnings and its predictable earnings growth – so the higher multiple seems justified.

At the half time break its neck-and-neck with both companies defences rendering the other side scoreless.

As we head into the second half it looks like the only thing that might split these two giants is growth. While Woolworths will struggle to grow its food and liquor and general merchandise retailing businesses at a rate much faster than inflation, the company does have new avenues of growth such as its move into hardware.

Meanwhile Westfield in conjunction with Westfield Retail Trust (ASX: WRT) has just received approval to merge the Australian and New Zealand operations of Westfield Group with WRT to form Scentre Group. This will leave Westfield as the owner and operator of an international portfolio of iconic assets in major world cities. Importantly under the new structure Westfield will have a development pipeline that will represent a greater proportion of assets, thereby skewing it towards higher growth potential and improving its returns on invested capital.

Westfield shoots and scores!

It was a mighty tight game that could have almost gone either way, but a last minute dash by Westfield under its new growth-oriented structure helped it to a 1-0 win over Woolworths.

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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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