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Should you be WOWed by the Woolworths share price?

Sebastian Bowen
Woolworths share price

The Woolworths Group Ltd (ASX: WOW) share price has had a stellar 2019 so far and if all remains on track, seems set for a stellar finish to the year to boot. WOW shares started the year off at $29.15 but are going for $37.64 at the time of writing – a YTD gain of more than 30% if you throw in dividends and franking credits.

In fact, WOW shares broke a new all-time high just 2 weeks ago – rising above the $40 mark for the first time ever and printing a new high of $40.04. Anyone who bought Woolworths shares back in 2016 for just over $20 a pop would have doubled their money in just over 3 years. Not bad for a blue-chip like Woolies.

But at today’s pricing, is there enough WOW factor left for Woolworths for a buy today, or indeed for 2020? Let’s look at the good and the not-so-good.

The good

For me, there is a lot to like about Woolworths, especially as a dividend stock. The grocery/supermarket business is a relatively defensive one, so WOW shareholders won’t (or shouldn’t) be too concerned if a recession or downturn in the business cycle takes hold.

In an industry awash with fierce competition from the likes of arch-rival Coles Group Ltd (ASX: COL) as well as Aldi and Costco, Woolies seems to have held onto its market share quite well. This is a very good quality for a business to possess – it’s something that Warren Buffett likes to call a ‘moat’.

Woolworths also pays a decent dividend, which has been growing since 2016 and came in at $1.02 per share this year. On current prices, this translates into a yield of 2.71% – or 3.87% grossed-up.

The not-so-good

Woolies is not what I would call a growth business. The supermarket industry has more or less reached a point of saturation in Australia. There are only so many corners you can put a new Woolies on and expect results. The main drivers that I see for the company going forward are population growth and cost-cutting.

The current WOW share price is also an orange flag for me. At $37.54, Woolworths shares are trading on 33 times company earnings. Since the market average is currently around 18, I would say that this indicates that the market is seeing significant growth in the future – growth that eludes this writer’s eyes.

Foolish takeaway

All in all, I see Woolies as a good company at a not-so-good price at the current time. A price-to-earnings ratio of 33 is a price I would struggle to pay for most companies, let alone one of the bluest blue-chips on the market today. Thus, it’s a stock I’ll be putting on the watch list for now.

The post Should you be WOWed by the Woolworths share price? 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. 2019