The Woolworths Group Ltd (ASX:WOW) share price has decreased 11.3% since the start of 2024. Meanwhile, the A2 Milk Company Ltd (ASX:A2M) share price is 25.2% away from its 52-week high.
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).
Since we consider Woolworths Group Ltd to be a blue chip stock, or a mature business, we like to look at things like return on invested capital (ROIC) and revenue growth as signs of sustainability. In FY23, Woolworths Group Ltd had an ROIC of 7.10% and revenue has compounded at 6.8% in recent years. If a mature business struggles to consistently hit 10% ROIC it could be a sign the business may not be investing its capital effectively. This is just a rule of thumb we follow.
A2M shares
Founded in New Zealand in 2000, The a2 Milk Company is involved with the sale of products sold under the a2 brand which contain the naturally occurring A2 protein type.
The company is not responsible for producing any of its products itself. It has access to over 25 certified dairy farms across Australia where its suppliers handle the production process. Additionally, its instant formula products are produced by its supply partner Synlait Milk in New Zealand.
There are various claimed health benefits of a2 Milk, the main one being that it’s easier to digest than ‘normal’ milk, so some people that normally have trouble with milk can stomach it a bit better.
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 4.33%, compared to its 5-year average of 2.92%. Put simply, WOW shares are trading above their historical average dividend yield.
Since A2M is more of a growth company than an established blue chip, a price-sales ratio might be a more appropriate assessment.The A2M share price currently trades at a price-sales ratio of 2.77x, which compares to its 5-year long-term average of 3.44x. So, A2M shares are trading below their historical average. However, a simple multiple like this should only be the start of your research. 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! Just remember there are many different ways to value a share, like A2 Milk Company Ltd.
