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3 reasons to buy Woolworths Limited in 2016

Credit: Scott Lewis

For shareholders in blue-chip retailer Woolworths Limited (ASX: WOW) it’s been a very disappointing half decade.

Over the past five years the share price has declined by 17%; while in the past 12 months the stock is down 23.5%. In both instances, the share price of Woolworths has significantly underperformed the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

While the recent past performance is certainly disappointing there are reasons of hope for a better future…

Turnaround potential – One of the big drags on earnings and no doubt an even bigger distraction for management has been the retailer’s decision to take on the Wesfarmers Ltd (ASX: WES) owned Bunnings with its Masters Home Improvement offering.

So far this has led to Woolworths bleeding significant amounts of cash. For the faithful however, if the board’s decision to enter this attractive market segment turns out to be ‘on the money’, then there could be significant upside.

Growth – Woolworths’ leading footprint of stores across Australia makes it one of the largest touch points to the Australian population. This access to literally millions of consumers creates an opportunity to cross-sell other services such as insurance, banking and telecommunications to its customers who regularly come through its doors.

While the market’s current focus is firmly on the competitive threats posed by entrants such as Aldi – certainly a real risk – less attention is being paid to the potential growth opportunities available to Woolworths.

Dividends – The group has a very impressive long term track record of paying out an ever increasing stream of dividends. In fact, the dividend has been raised every year since 1997.

In financial year (FY) 2015, Woolworths paid a record dividend totalling 139 cents per share (cps).

While this impressive track record looks set to end in FY 2016, with analysts forecasting a reduction in the dividend to 113 cps, this would still represent a fully franked yield of 4.9%.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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