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A deep dive into WOW shares

The Woolworths Group Ltd (ASX:WOW) share price is lower 7.1% since the start of 2024. It's probably worth asking, 'is the WOW share price undervalued?'

The Woolworths Group Ltd (ASX:WOW) share price is lower 7.1% since the start of 2024. Let’s take a look at why investors might be interested in WOW shares.

WOW share price in focus

Founded in 1924, Woolworths is a retail operator in Australia and New Zealand with over 3,000 stores and over 100,000 employees. It is one of Australia’s largest companies in terms of revenue and market share.

Woolworths’ main operations include supermarkets (under the Woolworths brand in Australia and Countdown in New Zealand), retailing through its discount department stores under the Big W brand, and business-to-business (B2B) brands like PFD. However, its 35%+ market share of Australian groceries is undoubtedly its crown jewel.

Woolworths is a very popular choice for many ASX investors seeking dividend income. Historically, it has consistently paid a fully franked dividend, usually at a yield of over 3%, and offers a very defensive earnings stream with most revenue coming from consumer staples. Its competitive advantage is best summarised as scale (distribution, low costs, etc.) and proximity (most shoppers still shop based on distance to the supermarket).

The case for Consumer staples

The S&P/ASX200 Consumer Staples Index (ASX: XSJ) has delivered -0.14% per year of capital growth over the last 5 years. That compares to the average of all ASX sectors of 3.85% over the same period. Let’s take a look at why you might want a consumer staples company like WOW in your portfolio.

Big dividends

While these types of companies might not deliver high growth, what they are known for is being solid dividend payers. Over the last 5 years the WOW dividend yield has averaged 2.96%per year.

The reason that they’re able to pay consistent dividends relates to reason number 2 that investors love consumer staples companies…

Recession-proof

Ok, they may not actually be ‘recession proof’ but consumer staples companies definitely have an advantage over other sectors during downturns. By definition the products that they sell are staples, like food, beverages, and household products.

When a recession hits and consumers look to cut their spending, it’s always the discretionary spending that’s the first to go. Staples are little more resilient, and so you’d expect a consumer staples company like WOW would hold up a bit better than others when things get tough.

Less volatility

The third advantage that consumer staples companies have is their low (ish) volatility. Because, like we said, their products are always in demand, these businesses don’t tend to be cyclical.

A commodity or resource company can be the victim of fluctuating market prices and seasonal downturns, but companies like Woolworths or Coles tend to have a bit more pricing power because of their market share and the consistent demand. So, growth may be lower than other sectors, but so is the volatility.

WOW share price valuation

One way to have a ‘fast read’ of where the WOW share price is, is to study something like dividend yield through time. Remember, the dividend yield is effectively the ‘cash flow’ to a share holder, but it can fluctuate year-to-year or between payments. Currently, Woolworths Group Ltd shares have a dividend yield of around 4.13%, compared to its 5-year average of 2.96%. Put simply, WOW shares are trading above their historical average dividend yield.

The 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 the share price.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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With bond ETFs like ASX:IAF and the S&P 500 riding high, now could be one of the best times to start earning passive income from a portfolio of shares and ETFs.

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