Why are the dividends from Woolworths shares still so small?

Rivals Coles and Metcash offer much more impressive dividend yields. How come?

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Key points

  • Woolworths is one of the ASX 200's most well known blue-chip shares
  • But it also one of the smallest yielding blue chips
  • The Woolies dividend yield is dwarfed by other ASX 200 shares, including its rivals Coles and Metcash

The Woolworths Group Ltd (ASX: WOW) share price arguably has many positives. Woolies is one of the most famous and established businesses in Australia with a commanding lead in its industry’s market share. Woolworths is also one of the largest businesses on the ASX. It’s currently the 10th-largest company on the S&P/ASX 200 Index (ASX: XJO) by market capitalisation.

But one area that Woolworths shares might not shine too brightly is dividends. The ASX 200 is known for its dividend prowess. Most of the top shares on the index pay out large dividends, exemplified by shares such as Westpac Banking Corp (ASX: WBC) and BHP Group Ltd (ASX: BHP). Today, Westpac shares offer a trailing dividend yield of 4.96%. BHP is even more impressive with its 10.58% trailing yield.

But the Woolworths dividend? It’s currently sitting at 2.51%.

Woolworths dividend: Why so low?

Now 2.51% is nothing to turn one’s nose up at. But it’s arguably rather small fry when compared to some other ASX shares. There are the heavy hitters, such as Westpac and BHP, of course. But consider this – at the current time, Woolworths’ arch-rival Coles Group Ltd (ASX: COL) is smashing Woolies with its own dividend yield of 3.28% right now. Woolies’ other major ASX-listed rival is Metcash Limited (ASX: MTS). Metcash is the company behind the IGA-branded supermarket chain. And it currently has a dividend yield of 4.32%.

When it comes to dividends in the supermarket space, Woolies is the clear loser. So why is this the case?

Well, it’s mostly a function of the Woolworths share price. See, Woolies currently trades at quite a premium compared to its rivals. Woolworths shares’ current price-to-earnings (P/E) ratio of 42.92 tells us that investors are willing to pay $42.92 for every $1 of earnings Woolworths makes. In contrast, investors are only willing to pay $24.69 for every dollar of earnings Coles brings in. And just $19.76 for every $1 of Metcash earnings.

If investors decided to give Woolies shares the same valuation as Coles currently enjoys, it would result in a large share price reduction for Woolworths. And thus, a big increase in Woolworths’ dividend yield. But that is not the case today. For whatever reason, investors are pricing Woolies shares at a premium to its competitors. And that comes with a lower dividend yield as a result.

At the current Woolworths share price, this ASX 200 grocery giant has a market capitalisation of $45.69 billion.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET. The Motley Fool Australia has recommended Westpac Banking Corporation. 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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