Woolworths Group Ltd (ASX: WOW) shares are a popular blue-chip investment on the ASX, beloved by many. As Australia's largest grocer and supermarket operator, Woolies is one of the best-known businesses and brands in the country.
It is undoubtedly a quality business. It has a strong and mature earnings base, domination of its industry, and a long-standing dividend policy.
But I'm not wild about Woolies shares right now. And I would certainly not want the worry of Woolworths in my share portfolio at present.
Charlie Munger, the right-hand man of legendary investor Warren Buffett, once said that "no matter how wonderful a business is, it's not worth an infinite price".
This is essentially my problem with Woolworths shares today. As we've already established, Woolworths is a wonderful business in my opinion. But it is also one that is not growing at a very fast rate.
Its latest full-year earnings (covering FY2022) revealed group sales rose 9.2% over FY2022 to $60.85 billion. But earnings before interest and tax (EBIT) dropped by 2.7% to $2.69 billion, while net profit after tax (NPAT) rose 0.7% to $1.51 billion.
This is understandable. After decades of expansion, Woolies is basically at saturation point. There are only so many groceries Australians are going to buy each year, no matter how much advertising the company does. And Woolworths is arguably at the point where adding more stores will not generate more sales.
That's all fine. The company is still very profitable and is able to return a large slice of those profits back to shareholders each year.
My problem with Woolworths is its valuation.
Are you getting your Woolies' worth with Woolworths shares?
At present, the company is trading on a price-to-earnings (P/E) ratio of 27.62. This means that investors are being asked to pay $27.62 for every $1 of earnings Woolworths makes. In my view, that is expensive. Very expensive:
To illustrate, let's compare this P/E ratio to those of Woolies' rivals. Coles Group Ltd (ASX: COL) currently trades on a P/E ratio of 21.8. IGA-operator Metcash Limited (ASX: MTS) has a P/E of 16.58 at present.
Woolworths looks even more expensive compared to ASX retail shares outside the supermarket space. Harvey Norman Holdings Limited (ASX: HVN) shares are presently on a P/E ratio of just 6.93. JB Hi-Fi Ltd (ASX: JBH) is sitting just above that on 10.08.
These businesses operate in a very different environment to Woolies. But still, this difference is a veritable ocean.
You can even buy shares of US-listed tech giants like Apple Inc (NASDAQ: AAPL) and Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL) on a lower P/E ratio than Woolworths today. Netflix Inc (NASDAQ: NFLX) is only just ahead of Woolies.
And those companies clearly have (at least in my view) far longer growth runways in front of them than Woolworths.
This goes a long way in explaining why the current dividend yield of Woolworths shares is so low compared to shares like Coles or Metcash.
So long story short, Woolworths is far too expensive for me to consider as an investment today. The company is of top-notch quality, to be sure. But it would have to fall by quite a lot for me to consider adding it to my portfolio.
