In a bull market where blue-chip stocks in general are skyrocketing, it's hard to believe that a company like Woolworths Limited (ASX: WOW) would be struggling. Yet that is an understatement for what is actually happening.
Over the last 12 months, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has rallied more than 10%, led by the banks and various other high-yield dividend stocks. In the same time, Woolworths, which has been one of the market's most beloved stocks over the last two decades, has declined almost 19%. It's up just 5% over the last five years.
Indeed, there are a number of reasons why the market no longer appears to want to hold Woolworths shares. For instance, there are fears that its leading position in Australia's $88 billion grocery industry could become compromised, while its Masters Home Improvement chain is also acting as a heavy drag on earnings.
While these are justifiable concerns for some investors, they are actually great for those investors who employ a longer-term approach. Here are some of the key reasons why…
- Woolworths' shares are trading near a two-and-a-half-year low, creating an excellent opportunity to buy a high-quality company at a discounted price
- Concerns regarding the rise of Aldi and Costco seem to have been overplayed. Both are discount retailers which should continue to gather market share, but neither should threaten Woolworths' 'sticky' customer base (both offer different product ranges to what Woolworths and Coles do)
- Woolworths and Coles, which is owned by Wesfarmers Ltd (ASX: WES), are grappling for market share, but only a small portion of customers are likely to switch over to a rival store. Most customers prefer to stick with a store they are familiar with
- Woolworths has one of the strongest track records for revenue and earnings growth. It's also a defensive play in that sales don't tend to fluctuate too much depending on the general state of the economy
- The market seems to be focused on the impact of its supermarkets investment, which will reduce near-term earnings. However, investors need to realise that the company could benefit handsomely in the long term as a result
The sixth reason why Woolworths appears to be such a great buy today is its excellent dividend yield. Interest rates are likely to fall even further over the next year or two which will make fully-franked dividends all the more appealing. At its current price, Woolworths is expected to yield 4.7% this financial year, or 6.8% grossed up, and that should only increase over the coming years.
