MENU

Why UBS just slapped a buy rating on Woolworths Group Ltd (ASX:WOW) shares

Credit: Scott Lewis

The Woolworths Group Ltd (ASX: WOW) share price is trading flat at $29.29 today even after researchers at investment bank UBS reportedly put a “buy” rating on the supermarket operator’s shares.

Woolworths has long been locked in a battle for market share with supermarket operator Coles Group Limited (ASX: COL) that has recently been spun-off by investment conglomerate Wesfarmers Ltd (ASX: WES).

These days both Coles and Woolworths face more competition from overseas discounters like Aldi and Costco, however, this does not appear to have put UBS analysts off.

So let’s take a look at a few reasons why UBS analysts may be keen on Woolworths shares.

  • The foods business delivered same-store sales growth of 1.8% for the 14 weeks to September 30, 2018. This is a reasonable result given the period reportedly included a negative impact on sales due to the decision to ban single-use plastic bags.
  • The group’s dividends are reasonably reliable due to the defensive revenue streams it earns as a dominant national supermarkets business. In FY 2018 it paid $1.03 per share in dividends, which gives it a trailing yield of 3.5% plus the benefits of full franking credits.
  • Despite the rising competition from overseas, the group still has a strong competitive position compared to the vast majority of other companies in the S&P / ASX200 for example. This gives it excellent bargaining power with its suppliers and helps to protect profit margins. Its everyday rewards program for example also helps ensure shoppers keep coming back.
  • Its alcohol retailing business under the Dan Murphy’s and BWS brands is in a very strong competitive position and highly profitable. Its bottle shop businesses delivered sales of $2.1 billion over the most recent quarter and the brands dominate the wines markets for example, with the only serious competition coming from Coles operated bottle shops.
  • After a period of poor performance, investors seem more confident in the group’s prospects under CEO Brad Banducci.
  • The November 9 sales of its petrol station business to EG Group for $1.725 billion means investors will expect some kind of capital management initiative from Woolworths’ management either in the form of a share buyback or special dividend.
  • It delivered $1.23 in earnings per share in FY 2018 and trades on 23x trailing earnings. This is not cheap, but analysts are forecasting healthy growth in earnings per share out to FY 2021.

Assuming its margins don’t come under too much pressure Woolworths could be a reasonable bet for dividend seekers. But there are probably better bets out there if you’re after growth, value and yield.

JUST RELEASED: Our Top 3 Dividend Bets for 2019

NEW! The Motley Fool’s team of crack analysts has just released a timely report revealing the names and codes of their top 3 dividend share recommendations for 2019. Be among the first investors to get access—FREE, for a strictly limited time. You’ll discover the names of 3 hefty dividend paying companies with what our analysts consider to be solid growth prospects for the year ahead…

The first two offer fat, fully franked yields and the third is a surprising REIT offering you the chance to become a landlord with none of the hassle! If you’re looking for hot new ideas, look no further. But you do need to hurry. Snap up your free copy now, before supplies run out!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our top 3 dividend share recommendations right away.

Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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.

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.