Is it time to buy shares of Woolworths Limited?

Despite the optimism on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) today, the Woolworths Limited (ASX: WOW) share price has failed to keep up. In fact, the shares are down 1.8% to $22.19, compared to a 1.4% gain for the broader market.

Some of today’s losses can be attributed to the fact that the shares are now trading without rights to the interim dividend. Woolworths declared a dividend of 44 cents per share (fully franked) for the first-half of financial year 2016 – down 34% compared to last year’s 67 cents per share payment – along with a 1.4% decline in sales and a net loss of $972.7 million.

With the ex-dividend date being 2 March 2016, investors who were holding the shares leading into today’s session are entitled to the dividend, which will be paid on 8 April.

It’s also likely that the shares are falling today after credit ratings agency Moody’s downgraded the company’s issuer rating and senior unsecured notes by one notch to Baa2 (outlook negative). It becomes the second major blue-chip company to have its credit rating downgraded after Standard & Poor’s recently cut its rating on BHP Billiton Limited (ASX: BHP).

The move reflects the issues currently impacting Woolworths, and those which threaten to continue acting as a drag on earnings over the coming years. You can read more about that, here.

Should you buy?

Investors once looked at Woolworths as one of Australia’s strongest companies. It had a rich history and was relied upon by families for their grocery needs – a need which could not generally be cut back on even during times of economic hardship.

Unfortunately, the company got way ahead of itself and has instead watched its competitive advantage dissolve. Coles, owned by Wesfarmers Ltd (ASX: WES), has enjoyed much stronger growth in recent times, while international rivals Aldi and Costco are also making their presence known.

Of course, Woolworths has made an effort to right its wrongs, including its decision to scrap its Masters home improvement venture, while it has also recently hired a new CEO in Brad Banducci (formerly of Cellarmasters).

However, I think the situation could still get worse for the retailer before it gets better. Margins will likely continue to compress, impacting earnings, while the dividend could also be cut back even further.

Woolworths’ share price has now fallen 9.4% since the beginning of the year, while it is down 43% since peaking at nearly $39 a share early in 2014. Although the shares might seem like good value today, I’m certainly not a buyer just yet.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Costco Wholesale. Motley Fool contributor Ryan Newman 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. You can follow Ryan on Twitter @ASXvalueinvest.

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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