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3 big reasons to stick with your Woolworths Limited shares

It’s so far, so good this year for investors in Woolworths Limited (ASX: WOW) with the share price in the leading retailer gaining 6.1% in calendar year 2014 compared with a gain of just 2.1% for the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

Currently the stock is selling around $3 below the all-time high of $38.92 set earlier in the year and is trading on a price-to-earnings ratio of 18.5 – based on a consensus forecast of 194 cents per share (cps) for FY 2014.

With the blue-chip due to report its full year results on 29 August some investors may be wondering if they should sit tight, buy more, or take profits. Here are three reasons to sit tight…

  1. Morningstar’s consensus estimate for the full year dividend is 138 cps. At the current share price of $35.87 this implies a fully franked dividend yield of 3.8% – this is roughly in line with the average large-cap market yield and should sustain support for the share price at these levels.
  2. Achieving profitability for the hardware division remains key. Last week Woolworths announced it had been granted approval by the regulator to purchase Hudson Building Supplies –a chain of hardware stores. It’s a new angle for the hardware division to take and could signal the start of a growth by acquisition strategy which arguably could be a better way to build scale rather than through organic means, which so far appear to have caused a higher level of cash burn than was initially anticipated.
  3. As I have highlighted before, both Coles, owned by Wesfarmers Ltd (ASX: WES) and Woolworths are set to make significant inroads into the financial services sector. Given the enormous and growing profits being reported by Australia’s banking system the sector would appear ripe for competition. The wide reach and significant customer base of the supermarket chains arguably makes them ideally positioned to chip away at the banking industry’s juicy profits.

An even better bet than 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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