The Woolworths Group Ltd (ASX: WOW) share price is down 5% over the past month, does that make it worth buying?
Woolworths operates Australia's largest supermarket chain, the listed business also operates other businesses like Big W and Dan Murphy's.
With Coles Group Limited (ASX: COL) now it's own listed business I think it's worth thinking about the supermarket sector.
Wesfarmers Ltd (ASX: WES) didn't have to divest Coles. If it thought it had a long-term, vibrant future then Wesfarmers would have kept it as part of the group.
Perhaps Wesfarmers management thought that Coles needs to do things like cutting prices to win market share, which wouldn't have been popular with investors.
Either way, Woolworths now has a standalone competitor with a management team focused entirely on winning the supermarket war, not running an entire retail conglomerate.
Woolworths has done very well to turn things around over the past couple of years. A few years ago it looked like Aldi-mania was going to permanently damage Woolworths profit margins.
However, Aldi continues to grow. Costco and Amazon are also muscling in on the sector. Woolworths management will need to do well to increase profit margins in the coming years.
The $1.725 billion sale to EG Group gives Woolworths a huge fund to either reward shareholders and/or re-invest back into the main business.
In FY18 Woolworths managed to increase the Australian Food earnings before interest and tax (EBIT) margin from 4.5% to 4.7%. That's why the segment managed to increase EBIT by 9.6% despite a sales increase of only 4.3%.
The good news has continued with all of Woolworth's segments reporting sales growth in the first quarter of FY19, where the important Australian Food section revealed 1.9% sales growth.
Foolish takeaway
Woolworths is currently trading at 22x FY19's estimated earnings with a grossed-up dividend yield of 5.2%.
While Woolworths may deliver returns greater than cash over the next five years, I think there are better ASX share ideas out there with more exciting growth potential. Price competition is likely to keep increasing.
