If you asked the average ASX dividend investor what their favourite ASX shares to buy for income might be, you will probably hear names like Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Wesfarmers Ltd (ASX: WES) and perhaps Woolworths Group Ltd (ASX: WOW).
Most ASX blue-chips have something of a reputation as dividend heavyweights, and Woolworths is no different. It's a mature company with a rock-solid brand and commanding dominance in the defensive sector of groceries, bottle shops and supermarkets.
But if we actually examine the current statistics surrounding Woolworths shares, they don't look too impressive from an income standpoint. Woolies' trailing dividend yield stands at 2.67%, based on the current price of $38.26 a share.
Now, Woolworths' dividend has historically come with full franking credits included, so if we factor this in, the grossed-up yield would come in around 3.8%.
That's not terrible, but its also not fantastic. For example, Commonwealth Bank's current grossed-up trailing yield stands at 7.37% and BHP at 6.82%. Other blue-chips like Westpac Banking Corp (ASX: WBC) boast higher yields still – 10.07% grossed-up, in Westpac's case.
So why is Woolworths' dividend so low?
Well, it's mostly because the Woolworths share price is so high. Let me explain.
On current pricing, Woolworths shares are trading on 33.67 times earnings. The current market average is around 19 times.
If a company's share price appreciates, but the same company's earnings don't, the earnings multiple (also called the P/E ratio) increases. Basically, investors are deciding that each dollar of earnings coming out of Woolworths is worth paying more for.
If this happens, the company's potential dividend yield falls for any investor wishing to purchase the shares. Picture a see-saw and you get the idea.
Now, if Woolworths' shares were to trade at a P/E of 19 (the market average), then we would have a Woolworths share price of approximately $21.58. That isn't inconceivable, especially considering Woolworths' arch-rival Coles Group Ltd (ASX: COL) is currently trading on a P/E of 19.29
At that price, we could expect a dividend yield of 4.73%, or 6.76% grossed-up, from Woolworths based on the same last interim and final dividends the company has paid.
That's looking a lot better from an income perspective.
Unfortunately, the market in its infinite wisdom has decided to price Woolies at a much higher earnings multiple than the market average, so investors who want to buy Woolworths shares for income have to accept their 2.67% starting yield.
Foolish takeaway
Whilst there's a lot to like about Woolworths as a company in my opinion, I don't see much value in the current share price today. I think its valuation is stretched from a growth standpoint – and as we've discussed, there are more lucrative options out there for income investors today.
