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Is the Woolworths share price a buy?

Is the Woolworths Group Ltd (ASX: WOW) share price a buy?

With RBA interest rates going so low, investors have been looking for ways to generate more income from their capital whilst still being quite defensive.

It’s certainly true that Woolworths’ supermarket earnings are quite defensive, people need to keep eating after all.

But the thing to remember is that share prices can change quite rapidly. If you buy Woolworths shares at $37 it could easily drop to $35 or $30 quite quickly – which might give you a paper loss – but that’s the point of shares, values can go up and down. We just have to make sure we pay a good price for the shares we buy so it gives us a margin of safety.

Woolworths is trading at 26x FY20’s estimated earnings. To most investors this would seem like an expensive price to pay for a large and mature business, but I suppose it doesn’t look too bad when you compare it to ones like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD).

Woolworths had a pretty decent FY19. Normalised Australian Food earnings before interest and tax (EBIT) rose by 3.8%, total sales from continuing operations climbed 3.4% to almost $60 billion, total EBIT rose 5% and normalised continuing net profit increased by 7.2%.

Even if Woolworths could replicate that profit growth in FY20, it’s not a very attractive PEG ratio – which compares the growth rate against the p/e ratio. A PEG of less than 1 is attractive. 

Woolworths continues to simplify its business as it looks to divest its Endeavour Drinks and ALH hotel business. Can the Food division and Big W grow by themselves? Management are certainly hoping so.

I do like that Woolworths is trying something different with a partnership with Marley Spoon AG (ASX: MMM)

Foolish takeaway

Woolworths used to have one of the best dividend growth streaks around, and another dividend streak may be starting. It currently has a grossed-up dividend yield of 3.9%. I don’t think this yield is high enough for the risks involved from more international competition, particularly due to the high valuation.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. 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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