Is Woolworths Limited’s credit downgrade bad news for investors?

Credit: Woolworths

Shares of Woolworths Limited (ASX: WOW) are trading 1% lower today as a two-pronged hit of negative news led its share price lower. By contrast, the S&P/ASX 200 (Index: ^AXJO)(ASX: XJO) was trading 1.4% higher.

Firstly, Woolworths shares went ‘ex-dividend’ today. That means investors on the supermarket giant’s share registry as of yesterday evening are entitled to the company’s most recent dividend payment of 44 cents per share.

Last week, Woolworths declared the dividend of 44 cents per share fully franked (down from 67 cents per share fully franked last year), which is to be paid into shareholders’ bank accounts on April 8 2016.

The company announced the reduced dividend payment on the same day it revealed a half-year financial loss of $972.7 million.

The second piece of news putting pressure on Woolworths’ share price was the decision by credit rating agency Moody’s to downgrade its assessment on Woolworths’ senior debt.

“Woolworths Limited (Woolworths) notes today’s announcement by Moody’s Investors Service (Moody’s) that its issuer rating and senior unsecured notes have been downgraded one notch to Baa2 (outlook negative),” Woolworths’ ASX filing read.

“The downgrade principally reflects Woolworths’ continued operational challenges across much of its portfolio,” Moody’s Vice President and Senior Analyst, Ian Chitterer, said. “The trend in comparable-store sales growth at its core Australian Food and Liquor business has been negative for the past three quarters and Woolworths does not expect a significant improvement in the 2H2016.”

Moody’s forecasts Woolworths’ adjusted debt/EBITDA ratio to weaken to around 3.8x in 2016 from the 3.5x reported last year.

Also, Moody’s said the negative outlook could only return to ‘stable’ if the company’s Australian Food and Liquor business began reporting comparable-store sales growth on a sustained basis. It said a rating upgrade is not likely for 12-18 months.

Moody’s revised credit rating comes one day after fellow credit rating agency Standard & Poor’s affirmed its rating of BBB+ (Negative Outlook).

Foolish takeaway

Here’s a tip for anyone reading credit ratings in the future: The first part (e.g. Baa2) of the rating is the actual credit ‘score’ if you will. The second part (e.g. ‘outlook negative’) is an opinion on the likely direction of the credit score. If you’re ever wondering what the ratings or outlooks may mean for your shares, you can check out Moody’s ratings, here.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

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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