For long-term, buy-and-hold investors who aim to utilise market weakness as an opportunity to add high quality, defensive, blue-chip stocks to their portfolio it's hard not to stop and take a look at Australia's largest retailer Woolworths Limited (ASX: WOW).
The stock is currently trading at not just a 52-week low but also a near four-year low. In fact, you would have been hard pressed to buy shares in Woolworths at levels below yesterday's closing price of $25.26 on many occasions since early 2007!
The share price of Woolworths has declined around 30% in the past year, compared with a fall of just under 11% in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). That alone tells you that investors are concerned that all is not right with the company.
Those concerns which relate to the well-publicised issues of a loss-making hardware division and increased competitive threats from the likes of Coles – owned by Wesfarmers Ltd (ASX: WES), Aldi and Costco are certainly justified but the real question for investors is how does it impact the valuation of Woolworths?
With the group just reporting its full year results, investors have plenty of financial data to wade through and analyse. Bottom line earnings per share before significant items fell 0.7% to 195.2 cents per share (cps), while the dividend was increased by 1.5% to 139 cps. Certainly not a great result but hardly dire.
The lack of a firm outlook statement by management was perhaps more alarming given the generally predictable nature of what should be a stable business.
While there would certainly appear to be downside risks to future earnings, with the stock trading on a price-to-earnings ratio of 12.9x and a fully franked dividend yield of 5.5%, arguably much of that downside is already priced in.
