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).

Let’s talk profits

If you’ve ever tried reading a company’s income statement on the annual report, you’ll know just how complex it can get. While there are any number of ways you could slice up the statement, three key figures are revenue, gross margin, and profit.

Revenue is important for obvious reasons – everything else (profit, margins, return on equity etc.) is downstream of a company’s ability to generate sales and revenue. What we’re looking for is not so much the absolute number, but the trend. WOW last reported an annual revenue of $67,922m with a compound annual growth rate (CAGR) over the last 3 years of 6.8% per year.

The next thing we’ll want to consider is the gross margin. The gross margin tells us how profitable the core products/services are – before you take into account all the overhead costs, how much money does the company make from selling $100 worth of goods and services? WOW’s latest reported gross margin was 56.0%.

Finally, we get to profit, the real headline number. Last financial year Woolworths Group Ltd reported a profit of $1,711m. That compares to 3 years ago when they made a profit of $2,074m, representing a CAGR of -6.2%.

A pulse check on WOW shares

Next, we could consider the capital health of the company. What we’re trying to work out is whether the company is generating a reasonable return on their equity (the total shareholder value) and whether they have a good safety buffer. One important measure to consider is net debt. This is simply the total debt minus the company’s cash holdings.

In the case of WOW, the current net debt sits at $15,424m. A high number here means that a company has a lot of debt which potentially means higher interest payments, greater instability, and higher sensitivity to interest rates. A negative value on the other hand indicates the company has more cash than debt, which can be seen as good (a big safety buffer) or bad (inefficient capital allocation).

Another figure we can look at is the debt/equity percentage. This tells us how much debt the company has relative to shareholder ownership. In other words, how leveraged is the company? Woolworths Group Ltd has a debt/equity ratio of 300.2%, which means they have more debt than equity. This isn’t always a bad thing if the company has stable revenue and good cash flow, but it certainly creates more risk.

Finally, we can look at the return on equity (ROE). The ROE tells us how much profit a company is generating as a percentage of its total equity – high numbers indicate the company is allocating capital efficiently and generating value, while a low number suggests that company growth may be starting to slow. WOW generated an ROE of 1.9% in FY24.

What to make of WOW shares?

One way to have a ‘speedy read’ of where the WOW share price is could be to study something like dividend yield through time. Remember, the dividend yield is effectively the ‘cash flow’ to a shareholder, but it can fluctuate year-to-year or between payments. Currently, Woolworths Group Ltd shares have a dividend yield of around 4.41%, compared to its 5-year average of 2.92%. Put simply, WOW shares are trading above their historical average dividend yield. Be careful how you interpret this information though – it could mean that dividends are growing, or it could mean the share price is falling, or both. In the case of WOW, last year’s dividend was greater than the 3-year average, so the dividend has been growing.

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 WOW share price.