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Woolworths Limited posts another strong year: Should you buy?

What: Retail giant Woolworths Limited (ASX: WOW) saw another strong year of performance from its eponymous supermarkets as normalised net profit climbed 6.1% to $2.45 billion on $60.8 billion of sales for the year. Total sales adjusted to normalise reporting periods were up 5.9% on the prior year.

The slightly higher normalised net profit demonstrates the company has been able to largely maintain or improve margins at its core grocery retailing businesses. This is critical to success and bodes well for future profit growth.

What now: While the supermarket business powers ahead the fly in the ointment may be the ailing Masters Home Improvement business, which posted an earnings before income tax loss of $176 million. This blamed on the Federal Budget’s impact on consumer confidence and competition from Bunnings Warehouse, owned by competitor Wesfarmers Ltd (ASX: WES).

While some have questioned the rationale for entering the home improvement market, Woolworths says Masters remains in its development stage as it moves from a start-up, to a scalable, profitable business.

What of the outlook: Given its consistent growth in shareholder returns and leverage to food inflation Woolworths undeniably remains one of the best investments among the S&P/ASX 200 (INDEXASX:XJO) Index of leading companies.

The company has forecast net profit growth of 4%-7% in FY15, however it also expects trading conditions to remain challenging as cost of living pressures have to be managed.

Post-announcement shares are trading at $36.35 which is 18.5 times 2014’s earnings per share of 196.5 cents. The fully franked dividend yield is 3.77% based on a full-year payout of 137 cents per share.

Due its mega-cap nature Woolworths will generally trade around fair value, with little prospect of significant price falls other than if the home improvement project turns out to be an over-ambitious waste of money. A feeling some Australians may already be familiar with.

Overall, Woolworths remains a good bet but it’s not going to shoot the growth lights out for you! However, there’s another far smaller stock we know that seems stuck right in the middle of a growth sweetspot. 

Best of all it remains on a cracking valuation, far better than Woolies! You can learn all about it for FREE. Simply click here for your copy of "The Motley Fool's Top Stock" and we'll email you the name, code and details straightaway all for FREE.

Motley Fool contributor Tom Richardson has no financial interest in any company mentioned. You can find him on Twitter @tommyr345

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