Woolworths Limited (ASX: WOW) shareholders have been taken on a bumpy ride over the last 12 months, in which time the stock has crashed 19%. That compares to a 3.1% lift for primary rival Wesfarmers Ltd (ASX: WES), which owns Coles, and a 9% rise for the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
To make matters worse, options traders and short sellers are betting the price will fall below its current $29 price tag with the Fairfax press recently highlighting that short interest in the stock is near the highest on record, equating to 6.9% of outstanding stock.
It's clear that investors are concerned about Woolworths' ability to continue generating market-beating returns in the future, partially due to its underperforming Masters Home Improvement chain and the added competition from Aldi Australia and US supermarket giant Costco.
While this short interest is bad news for short-term pundits; it is actually keeping shares at a level that could prove attractive for long-term investors. Here are five reasons you should consider buying Woolworths today.
- Competition concerns. Aldi is a discount retailer with a far more limited product range than either Woolworths or Coles offer – a fact that even Aldi Australia's CEO Tom Daunt has admitted (and stated will not change). Meanwhile, Costco stores are few and far between, making it less convenient for consumers to shop regularly. While both will likely continue to gain market share, I perceive it as unlikely they will ever threaten the dominance of Woolworths or Coles.
- Defensive. The vast majority of Woolworths' sales are made in its supermarkets division. No matter what the conditions of the economy at any one time, people still need to eat. This makes Woolworths a defensive business. This has been proven over time by Woolworths' ability to continue generating sales and earnings growth.
- Long-term focus. Woolworths' shares plummeted following its most recent earnings report after the company referenced a major investment in its supermarkets division which would ultimately impact its full-year earnings. While disappointing for short-term investors, upgrading its supermarkets could be great for sales growth in the long term.
- Excellent Price. At $29 per share, Woolworths hasn't traded this low since late 2012. Given the quality of the business, now could be an exceptional opportunity to begin building a position.
- Dividends. Woolworths has also consistently grown its dividends and is expected to pay 139 cents per share this financial year (according to Morningstar estimates). With the shares trading at $29, that implies a fully franked yield of 4.8% (or 6.8% grossed up).
