Woolworths Stock: Is it a Buy Amidst Dividend Alert?

Owners of Woolworths Group Ltd (ASX: WOW) stock are receiving substantial dividends from the ASX supermarket share. In this article, we'll explore whether the company presents an investment opportunity at present.

Woolworths, denoted on the Australian Stock Exchange as ASX: WOW, stands as Australia's largest supermarket business and serves as the primary revenue generator. Alongside this core operation, the company encompasses diverse businesses, including Countdown supermarkets in New Zealand, Big W, B2B suppliers like wholesaler PFD, and various retail platforms.

Examining Woolworths' Dividend Record

Woolworths has a commendable long-term dividend track record, showcasing consecutive annual growth until FY15 when it paid $1.39 per share. The dividend reduced to 77 cents per share in FY16 due to challenges from Aldi's growth and competition, as well as issues with its former home improvement business, Masters.

In FY23, the final dividend per share saw a 9.4% increase to 58 cents, contributing to a 13% rise in the full-year dividend to $1.04 per share. The full-year dividend represented 78.6% of earnings per share (EPS) from continuing operations.

At the current Woolworths share price, the company offers a trailing grossed-up dividend yield of 4.3%. The forecast on Commsec suggests potential dividends of $1.12 per share in FY24 and $1.20 per share in FY25, implying future grossed-up yields of 4.6% and 5%, respectively.

Is Woolworths a Buy?

Woolworths benefits from current economic trends, including Australia's growing population and rising food prices. The increase in population leads to more customers, and food inflation contributes to stronger revenue.

UBS rates Woolworths as a buy, setting a price target of $42, anticipating a 20% rise in the share price over the next year. Despite falling inflation, UBS believes Australian food like-for-like sales growth can remain robust, driven by population growth, changes in food purchasing behavior, and the company's strategic execution.

Additional Considerations

UBS acknowledges the challenging guidance from Woolworths' New Zealand business, which reported weakening sales and lower earnings guidance for FY24's first half. However, UBS anticipates a recovery, emphasizing positive steps in pricing, loyalty programs, and store rebranding, albeit with elevated execution risk.

Long-term forecasts from UBS predict consistent EPS and dividend growth from FY24 to FY28. While Woolworths' FY24 estimated earnings place the stock at 22 times earnings, the forecasted EPS of $1.86 in FY28 would result in a valuation of under 19 times estimated earnings.

Emphasizing the importance of long-term focus in investing, Woolworths' outlook appears promising, combining dividend growth potential with resilience in a challenging market environment.