Is the Woolworths share price a buy?

Is Woolworths Group Ltd (ASX: WOW) share price a buy? I think it’s worth looking at.

The supermarket giant share price went up 1.5%, with the only real news today coming from Metcash Limited (ASX: MTS) which said that while year-to-date total food sales were marginally higher, the Supermarkets division has supposedly seen more declines.

Declines for Metcash could be a good thing for Woolworths.

Although the recent Woolworths result from reporting season wasn’t exactly stellar, it was sufficient to cheer shareholders.

Continuing operations sales increased by 2.3% to $30.6 billion, earnings before interest and tax (EBIT) grew by 1% to $1.45 billion, net profit after tax (NPAT) increased by 2.1% to $920 million and earnings per share (EPS) increased by 0.9% to 70.3 cents. All of the figures showed growth, albeit a small amount.

Before 2016 Woolworths shareholders could look forward to an annual increase of the dividend. Perhaps the same can be said again – in the half-year report the Woolworths dividend was increased by 4.7% to 45 cents per share.

However, everything wasn’t as good as the headline suggests. Looking at the business EBIT performance of each segment, Endeavour Drinks (includes Dan Murphy’s), New Zealand Food and Hotels all saw the EBIT contribution decrease. Big W EBIT improved by $2 million, but was still a loss of $8 million. The only thing that carried the result was the Australian Food division growing EBIT by 4% to $937 million.

For how long can Woolworths continue to grow sales and EBIT whilst showing a decline in the change of average food prices? Excluding tobacco, the Woolworths average price dropped by around 2.5% in the first half of FY19.

Foolish takeaway

Woolworths shares are trading at 23x FY19’s estimated earnings with a grossed-up dividend yield of 5.1%.

Whilst the dividend yield and valuation isn’t too bad, it’s not cheap enough nor is the income big enough to attract me to buying shares its shares.

I think there are better defensive shares on the ASX for dividends and growth like these long-term winners.

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Motley Fool contributor Tristan Harrison has no position in any of the 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 Scott Phillips.

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