Will Woolworths’ Laundry Powder Cartel Behaviour Soil Its Reputation?

It seems like Woolworths (ASX: WOW) can’t catch a break, lately, with years of market-leading margins finally catching up with shareholders.

This afternoon, the Australian is reporting that “Woolworths has this afternoon been ordered to pay a fine of $9 million after admitting involvement in a laundry detergent cartel.”

This comes on the back of news in February that, the ACCC took a successful action alleging Woolworths alleging “made false or misleading representations about the safety of a number of products sold under the company’s Homebrand and Masters label.” The retail giant was fined $3 million for that.

And in December last year, the ACCC alleged that Woolworths “acted in contravention of the Australian Consumer Law to eke $18.1 million from its suppliers.”

While Woolworths shareholders are unlikely to be troubled by small fines (that arguably don’t act as much of a dis-incentive), consumers are less likely to ignore that bad publicity.

Indeed, with fierce competition from Aldi at the cost sensitive end of the market, and Coles pressuring Woolworths in the traditional supermarket offering, it’s hard to see why anyone would buy Woolworths shares right now.

In my view there is no valid reason to hold declining or underperforming companies in my portfolio. I believe long term returns depend mostly on selecting a few big winners in the portfolio. Therefore, I would prefer to invest in companies that have a decent chance of being big winners. Usually big winners are fast growing companies, but sometimes you can get a big winner by a contrarian decision to buy when sentiment towards a company is very negative. But I don’t think Woolworths is there yet.

Key reasons to sell a company include falling or stagnating revenues, falling profits and the departure of a long serving CEO.

Each of these three considerations indicate to me that the odds are against Woolworths shareholders. With the business in decline, and debt weighing down the balance sheet, I would probably sell Woolworths shares if I owned any. Personally, I don’t understand why someone would buy Woolworths shares at the moment, since there are many other blue chip companies on offer that are actually growing.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget BHP and Woolworths. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Claude Walker has no position in any stocks mentioned. You can follow him on Twitter @claudedwalker.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.