WoW share price in focus
Founded in 1924, Woolworths is a leading supermarket operator with more than 3,000 stores and more than 100,000 employees in Australia and New Zealand. In terms of revenue and market share, it is one of Australia’s largest companies in any sector.
In addition to the supermarkets we all know (but don’t exactly love according to consumer confidence ratings), Woolworths Group also operates discount department stores under the Big W brand, as well as business-to-business (B2B) brands such as PFD, a foodservice distributor. However, Australian grocery’s 35%+ market share is undoubtedly its crown jewel and biggest revenue driver.
Woolworths has historically been a popular choice for ASX investors seeking dividend income due to its fully transparent dividend, typically yielding over 3%. It also offers a ‘defensive’ revenue stream with most of its revenue coming from consumer staples. This means that in an economic downturn, Woolworths may be less likely than other companies to see a significant decline in earnings.
Key metrics
If you’ve ever tried to read a company’s income statement on an annual report, you know how complicated it can be. Although there are many ways you can break down a statement, there are three main ones. Revenue, Gross Marginand profit.
Revenue is important for obvious reasons – everything else (profits, margins, return on equity, etc.) is downstream of a company’s ability to generate sales and revenue. What we are looking for is not an absolute number, but rather. trend. WOW last reported annual revenue of $67,922m with a Compound Annual Growth Rate (CAGR) 6.8% per annum over the last 3 years.
The next thing we’ll want to look at is gross margin. Gross margin tells us how profitable the underlying products/services are – before you take into account all overhead costs, how much money does the company make selling $100 worth of goods and services? WOW’s most recently reported gross margin was 56.0%.
Finally, we get the profit, the real headline number. Last financial year Woolworths Group Ltd reported a profit of $1,711m. This compares to 3 years ago when they made a profit of $2,074m, representing a CAGR of -6.2%.
Financial health of WOW shares
Next, we can consider Capital Health of the company. What we are trying to work out is whether the company is generating a reasonable return on their equity (total shareholder value) and whether they have a good buffer of safety. There is an important step to consider. Net debt. It is simply the total debt minus the company’s cash holdings.
In WOW’s case, current net debt sits at $15,424m. A higher number here means that the company has a lot of debt which potentially means higher interest payments, higher volatility, and higher sensitivity to interest rates. A negative value, on the other hand, indicates that the company has more cash than debt, which can be seen as good (a large safety buffer) or bad (inefficient capital allocation).
A metric that may be more valuable to us. Debt/Equity Percentage. It tells us how much debt the company has compared to shareholder ownership. In other words, how leveraged is the company? Woolworths Group Ltd’s debt/equity ratio is 300.2%, which means they have more debt than equity. This isn’t always a bad thing if the company has stable earnings and good cash flow, but it certainly creates more risk.
Finally, we can see Return on Equity (ROE). ROE tells us how much profit a company is making as a percentage of its total equity – a high number indicates that the company is effectively allocating capital and creating value, while a low number indicates that the company’s growth may be starting to slow. WOW generated an ROE of 1.9% in FY24.
What to make of WOW shares?
One way to get a ‘quick study’ of where the WOW share price is may be to study something like the dividend yield over time. Remember, the dividend yield is effectively ‘cash flow’ to a shareholder, but it can fluctuate from year to year or between payments. Currently, shares of Woolworths Group Ltd have a dividend yield of about 4.03%, compared to a 5-year average of 2.92%. Simply put, WOW shares are trading above their historical average dividend yield. Be careful how you interpret this information – it could mean profits are rising, or it could mean the share price is falling, or both. In WOW’s case, last year’s dividend was higher than the 3-year average, so the dividend is growing.
Rask websites offer free online investing courses, created by analysts explaining things like discounted cash flow (DCF) and dividend discount models (DDM). They even include free valuation spreadsheets! Both of these models would be a better way to value WOW share price.
