I think Woolworths shares are a solid buy for 3 reasons

Here's why it looks like an appealing time to invest in this blue-chip stock.

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I like the idea of investing in growing ASX blue-chip shares at a good price. Given how much the Woolworths Group Ltd (ASX: WOW) share price has dropped in the last few months (see the chart below), it could be time to review the supermarket giant for a few reasons.

It's true that Woolworths hasn't covered itself in glory during this period of elevated inflation. However, interestingly, it advised in its FY24 third-quarter report that total inflation (excluding tobacco) was negative 0.7%.

Amid the challenges, there are three reasons why I think interested investors should pounce now.

Weak market sentiment and low Woolworths share price

We've seen the Woolworths share price decline by around 25% since June 2023. It's rare for the market to be so pessimistic about the company. I'm not convinced Woolworths' long-term future prospects have dimmed as much as the market is suggesting.

I don't expect a quick turnaround, but I think now is a good time to invest in the business while it's trading at a lower price/earnings (P/E) ratio.

Broker UBS thinks Woolworths can generate $1.32 of earnings per share (EPS) in FY24 and FY25, putting the Woolworths share price at 23x forward earnings.

The recent FY24 third quarter numbers showed BIG W sales had dropped 4.1% year over year to $1 billion. Retailers sometimes are cyclical through different economic conditions, so I'd say this is an opportunistic time to get exposure to the department store's earnings.

Defensive revenue

With everything that has happened in 2024, you'd think Woolworths' supermarket sales went backwards. But in the FY24 third quarter, it reported supermarket sales increased 1.5% year over year. Costs are another element – which weren't detailed – but the fact its sales grew is a positive longer-term trend for earnings.

We all need to eat food, so I'd suggest Woolworths' revenue and (largely) the profit can be resilient.

Indeed, UBS' estimates suggest the business could generate $68.2 billion in sales in FY24, $69.3 billion in FY25 and $71.5 billion in FY26. Its sales could keep marching higher even if the era of high food inflation is over.

EPS is expected to be $1.32 in FY24 and FY25, with ongoing increases after that to $1.42 EPS in FY26, $1.57 in FY27 and $1.74 in FY28.

Australia's population is still growing, so there are more potential customers who may buy food, and this could help future financial periods.

Good dividend payout

There is no knowing when the Woolworths share price will start recovering. Higher profits could help reignite interest in the business, and dividend payments could reward a long-term hold in the meantime.

It may not be huge, with UBS projecting a grossed-up dividend yield of 4.5% in FY24, 4.9% in FY26 and 6% in FY28 at the current Woolworths share price. The lower price has pushed up the prospective dividend yield.

If the profit and share price can rise, then total shareholder return could be solid, though not explosive.

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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