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Will Woolworths shares bank another 24% ASX gain in 2020?

Sebastian Bowen

A surprise performer in 2019 was the Woolworths Group Ltd (ASX: WOW) share price. As one of the oldest and bluest blue-chips on the ASX, Woolworths doesn’t exactly have a reputation as a high-octane ASX growth stock.

But that did nothing to stop WOW shares banking a 24.04% share price gain in 2019. If you throw in Woolworths’ fully franked dividends, these gains get bumped to around 28% for shareholders. WOW indeed. And that even includes the end-of-year slump that the ASX saw fit to see the year out with. If you took the Woolworths share price from 30 December, these yearly gains would be somewhere in the 32% range (dividends included).

Still, we have here a market-beating return and one that places Woolies shares on a price-to-earnings (P/E) multiple of around 32 as we start the new decade. Yep, that’s 30 + 2. For a supermarket.

What does 2020 look like for Woolworths?

Well, for the Woolworths share price to go higher this year, 1 of 2 things must happen. Either the company’s earnings must grow AND investors still have to be willing to pay 32 times for them.

Otherwise, investors must purely decide to pay more for the same level of earnings from the company, which would push the price and P/E ratio higher still.

Now, I fully expect Woolworths to grow its earnings in 2020. But not by much.

For some context, the company booked earnings before interest, tax, depreciation and amortisation (EBITDA) of $2.33 billion in 2017, $2.55 billion in 2018 and $2.23 billion in 2019.

So earnings have essentially been flat over the past 3 years. I think it would be fairly safe to predict earnings growth coming in at single digits next year (in my opinion anyway). Certainly not enough to reduce Woolworths’ P/E multiple by much next year.

So why are investors paying so much for Woolworths?

I think Woolies’ reputation for a ‘safe’ dividend is really what’s behind the company’s current valuation. In this low interest rate world, having a nice reliable dividend income is likely to be what most current Woolworths investors are after. The company’s plans to spin-off its drinks businesses later this year is likely also helping.

Foolish takeaway

Whilst I love Woolworths as a company, I think its current share price is asking a bit much for a low-growth mature business. Thus, I’m not interested in Woolies at the current time and certainly don’t expect WOW shares to repeat their 2019 performance in 2020.

The post Will Woolworths shares bank another 24% ASX gain in 2020? appeared first on Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020