Is this the next ASX blue-chip stock to undertake a billion-dollar plus capital return?

The Woolworths Group Ltd (ASX: WOW) share price is on a winning streak with the stock recording its seventh-straight trading day of gains.

The market believes our largest supermarket chain could be the next ASX stock to launch a billion-dollar-plus capital return to shareholders after Rio Tinto Limited (ASX: RIO) became the latest blue-chip to successfully undertake a $2.9 billion share buyback.

Woolworths’ share price jumped 1.3% to a one-month high of $29.81 during lunchtime trade while the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index was flat.

There’s no firm date or even a confirmation from Woolworths on a capital return but investors are already smacking their lips in anticipation after the company announced the sale of its petrol division to UK-based EG Group for $1.7 billion on Friday.

The sale price was a little more than what the market had been anticipating after BP was blocked from buying the business for $1.8 billion by the competition regulator.

Most investors didn’t think Woolies would get anything near BP’s offer, so EG Group’s offer price is seen as great news and is priced on similar multiples to fuel retailers Caltex Australia Limited (ASX: CTX) and Viva Energy Group Ltd (ASX: VEA).

“We estimate Woolworths could return ~$1.5 billion to $2.0 billion in capital in August 2019. This would leave Woolworths at a fixed charges cover ratio of ~2.7x,” said Citigroup.

“While the method of capital return is still to be determined, an on-market buy-back could generate ~2% EPS [earnings per share] accretion.”

Undertaking an off-market buyback, like what Rio Tinto did, could even be more value accretive as such a transaction could see Woolworths distribute a chunk of its $2.6 billion in franking credits to shareholders who tender their shares into the buyback.

A Labor federal government may take some gloss off this strategy though it if carries out its threat of removing franking credit cash refunds.

Deutsche Bank also highlighted the distinct possibility of capital management from Woolworths and thinks the company is getting a good price for the business given the tough market condition with the major fuel retailers losing ground to independent petrol stations.

“The deal offers other benefits for Woolworths – the fuel discount offer and Rewards will continue, and Woolworths will benefit from wholesale supply,” said Deutsche.

“We expect a net cash position creating an opportunity to distribute capital and release some of the $2.6b franking credit balance.”

Both brokers have a “buy” recommendation on Woolworths with Citi slapping a $33 per share price target on the stock and Deutsche pegging a target of $31 per share.

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Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. 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 Scott Phillips.

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