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WOW shares: your next blue chip investment?

The Woolworths Group Ltd (ASX:WOW) share price is down 20.6% 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 down 20.6% since the start of 2024. At the same time, the Zip Co Ltd (ASX:ZIP) share price is 9.2% away from its 52-week high. This brief article explains why it could be worth adding WOW and ZIP shares to your ASX investing stock watchlist.

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).

ZIP shares

Zip Co was founded in 2013 and is a financial technology company. It offers a buy-now-pay-later (BNPL) service that is popular among retail consumers.

Zip allows customers to purchase items immediately and repay them over interest-free instalments.

Zip operates on a global scale with over 79,300 retail partners and 6 million customers. In September 2020, Zip acquired US-based BNPL company Quadpay to further establish itself in the US market.

WOW share price valuation

We would consider WOW to be a ‘mature’ or ‘blue-chip’ business, so some of the metrics that might be important to us include the debt/equity ratio, average yield, and return on equity, or ROE. For FY24, Woolworths Group Ltd reported a debt/equity ratio of 300.2%, meaning the company is leveraged (it has more debt than equity). This can increase risk so it’s important that a leveraged company has stable returns and the capacity to pay interest on its debts.

Over the last 5 years, WOW has delivered an average dividend yield of 2.9% per year. This is important to note if you’re looking for income from your investments.

Finally, in FY24, WOW reported an ROE of 1.9%. For a mature business you generally want to see an ROE of more than 10%, so WOW’s returns are a bit less than what we’d expect.

As a growth company, some of the trends we would be looking for from ZIP shares include revenue growth, profit growth, and return on equity (ROE). Over the last 3 years, ZIP has increased revenue at a rate of 75.7% per year to hit $868m in FY24. Meanwhile, net profit has risen from -$678m to $6m. ZIP’s last reported ROE was 1.8%.

Please keep in mind that context is important – these metrics give us some indication of company performance, but we need a lot more info to work out the value of WOW or ZIP shares. To learn more about valuation, I’d recommend signing up for one of our free online investing courses.

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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.

In this free analyst report, our Chief Investment Officer, Owen Rask, names 10 ASX stocks and ETFs to watch.

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