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The bull case for Woolworths Limited shares

Credit: Woolworths

Is the 25% crash over the past year in Woolworths Limited’s (ASX: WOW) share price a buying opportunity?

It could be if the market has priced in an overly pessimistic view and misjudged the potential for the company to stage a turnaround in its fortunes.

Increased competition from Aldi – which has recently begun an aggressive expansion into South Australia and Western Australia – is a major reason to remain hesitant about the outlook for growth in Woolworths’ key supermarket division.

There are still a number of reasons to remain positive on the longer term prospects for the stock however.

The bull case:

Dividends. Forecasts suggest the dividend could be cut from 139 cents per share (cps) in FY 2015 to just 88.9 cps in FY 2018.

Even if this dramatic cut occurs, the stock arguably remains attractive with an implied fully franked dividend yield of 4.1%. (Source: CommSec)

Home Improvement losses coming to an end. Much has been said about the disastrous foray into home improvement which pitted the Masters-branded business against the established and powerful Bunnings brand, owned by Wesfarmers Ltd (ASX: WES).

Despite this seemingly bad decision (or perhaps it was just poor execution), the fact remains that the drag on earnings that Masters has caused the group will soon enough come to an end thanks to the decision to close or sell the division.

Supermarkets still strong. Keen competition from a resurgent Coles and an expanding Aldi has undoubtedly affected Woolworths, although the most affected of the listed majors would appear to be independent store wholesaler Metcash Limited (ASX: MTS).

Indeed, although Woolworths has seen pressure on growth rates and margins, the supermarket business is still arguably an above average, high quality business.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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