Woolworths Group Ltd (ASX: WOW) is a leading player in the Australian supermarket industry, but I’m avoiding buying right now because I think there’s a better option.
Woolworths was founded in 1924 by Percy Christmas, its first store was opened in Sydney’s Imperial Arcade. Woolworths is Australia’s largest supermarket business, operating Woolworths supermarkets in Australia and Countdown in New Zealand. It also runs the retail department store Big W. With over 3,000 stores and more than 200,000 employees it’s one of Australia’s largest employers.
Why I’m Not Buying
I think Woolworths shares are currently overpriced. For example, the shares currently trade at a price-earnings (P/E) ratio of 24 times and are just about touching a 52-week high (the price at the previous close was $31.94 while the 52-week high is $31.98).
In their half-year report, Woolworths also announced the closing of around 30 Big W stores, revealing the chain was producing an EBIT loss of $8 million.
While I think Woolworths has growth potential, particularly with an increasing population, I think there are better options at today’s prices.
Coles Might Be Worth a Second Look
Coles Group Ltd (ASX: COL) shares are fairly new to the ASX, having been spun off from Wesfarmers Ltd (ASX: WES) to become their own listed company in November 2018.
While they’re yet to pay a dividend, they are estimating a dividend payout ratio of 80-90%. If this is the case, the potential dividend yield is significantly higher than the yield offered by Woolworths shares (2.97%).
The shares are also trading at a slightly lower P/E ratio of 22.6 times. With the announcement of their new partnership designed to increase online grocery shopping and automation, I think Coles has considerable growth potential over the long term.
To be clear, I don’t think that Coles is the next hot growth stock and I don’t think investors will see immediate positive returns. However, over the long-term, at current prices, I think Coles shares present better value than Woolworths shares.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.