Dividend alert: Is Woolworths stock a buy?

Is this dividend share a good idea to look at today?

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Owners of Woolworths Group Ltd (ASX: WOW) stock are getting solid dividends from the ASX supermarket share. In this article, I'm going to look at whether the company is an investment opportunity today.

The biggest earnings generator for the company is the Woolworths supermarket business. But there are plenty of other businesses within the ASX share's operations. These include Countdown supermarkets in New Zealand, Big W, business-to-business (B2B) suppliers including wholesaler PFD, retail platforms including Primary Connect, Cartology, Quantium, and WPay, and the company's majority stake of Petspiration (the owner of PETstock).

Let's have a look at Woolworths' dividend credentials first.

Woolworths dividend

Woolworths has a long-term dividend track record, with a number of years of consecutive annual growth up until FY15 when it was paying $1.39 per share. In FY16, the dividend was cut to 77 cents per share as the company suffered from the growth and competition of Aldi, as well as issues at its former home improvement business Masters.

The Woolworths dividend of $1.04 per share in FY23 was substantially higher than the FY16 dividend, but it's still lower than it was in FY15.

In FY23, the final dividend per share increased by 9.4% to 58 cents per share and the full-year dividend increased by 13% to $1.04 per share. That full-year dividend represented 78.6% of earnings per share (EPS) generated from continuing operations after significant items.

At the current Woolworths share price, the company offers a trailing grossed-up dividend yield of 4.3%.

The current forecast on Commsec suggests Woolworths could pay a dividend per share of $1.12 in FY24 and $1.20 per share in FY25. That implies future grossed-up dividend yields of 4.6% in FY24 and 5% in FY25 at the current Woolworths stock price.

Certainly, if the dividend keeps rising, the company could be increasingly attractive for income-focused investors.

Is the ASX supermarket share a buy?

Woolworths is benefiting from current economic trends including Australia's growing population and the inflation of food prices.

With more people in the country, there are simply more mouths to feed and more shoppers in the supermarket. Food inflation can equate to stronger revenue for the company for the same items sold. If margins are maintained, revenue growth should translate into profit growth.

The broker UBS currently rates the company as a buy, with a price target of $42.

A price target is a forecast by the broker of where the share price will be in 12 months from now. UBS is suggesting the Woolworths share price could rise by around 20% over the next year.

UBS has confidence in the company despite falling inflation because it thinks Australian food like-for-like (LFL) sales growth can remain "strong". The broker sees 'real' LFL sales growth continuing due to population growth, trading down from out-of-home food purchasing, and the company's execution of its strategy.

Other considerations

However, UBS also noted the disappointing guidance from the company's New Zealand business. The segment reported weakening sales during the first quarter of FY24 and guidance of lower earnings in the first half of FY24. But UBS is forecasting a recovery over time, noting "positive steps in pricing, loyalty & store rebranding, yet recognis[ing] elevated execution risk".

UBS has forecast Woolworths can generate earnings per share of $1.58 in FY24, which would put the current Woolworths stock price at 22 times FY24's estimated earnings. UBS suggests the Woolworths dividend per share could be $1.17 in FY24.

Long-term forecasts can change, but at the moment UBS has predicted Woolworths can grow its EPS and dividend every year between FY24 to FY28. It's forecasting EPS of $1.86 in FY28. If the profit did grow to that level, it would be valued at under 19 times FY28's estimated earnings. Certainly, it's always a good idea to focus on the long-term when it comes to investing.

Motley Fool contributor Tristan Harrison 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 no position in any of the stocks mentioned. 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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