After getting whacked in the lead up to the COVID crash of March 2020, the Woolworths Group Ltd (ASX: WOW) share price has held its own.
While not quite as impressive as the likes of Wesfarmers Ltd (ASX: WES) or Coles Group Ltd (ASX: COL), Woolies shares have certainly been a net beneficiary of panic buying and… dare I say it… maybe even some stress eating as Aussies were forced to stay at home.
Woolworths was founded in 1924 by Percy Christmas, its first store was opened in Sydney’s Imperial Arcade.
Today, 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, it’s one of Australia’s largest employers.
As detailed by Rask Media’s Jaz Harrison in April, Woolworths reported a 10.7% increase in sales during its third quarter, to $16.5 billion, with the Australian Food division’s sales up 11.3%.
Fast forward a few weeks and for the 10 weeks ending 14 June 2020, the company said Australian Food sales were up 8.6% but it would be forced to incur costs of between $220 million and $275 million as a result of extra COVID costs (cleaning, disinfectant, restrictions, etc.).
The company set its 2020 financial year operating guidance at around $3.25 billion, which would imply a modest decline from the $3.29 billion reported last year.
Are Woolworths shares cheap?
In the following video, taken from our free online share valuation course where Woolworths was my case study and I explain how to value Woolworths shares using six different valuation models, I explain how to value Woolies shares with a DCF analysis:
Is this an alternative to Woolworths shares?
While Woolworths may be a great investment idea at the right price, in my opinion most investors purchase Woolworths shares because they’re seeking secure dividend income. Specifically, regular fully franked dividends.
As an investment analyst, I could model Woolworths’ shares quite easily, and so can many other experienced and qualified investment professionals. If I were looking at Woolworths as a dividend play right now, I’d want to make assumptions on the following:
- Sales per square metre of store space (or per store)
- New store openings
- EBIT margins — based on the prices of equivalent products at Aldi, Metcash Ltd’s (ASX: MTS) IGA and Coles, and
- Management’s dividend policy going forward
Those are four key assumptions for an analyst to make before doing their valuation. Our team would be comfortable making those for our paying members and determine an intrinsic valuation for Woolworths.
However, if you’re sitting back and thinking only about dividend income from the sharemarket, or if you simply don’t have the time or skills to do a proper valuation of Woolworths, I’d encourage you to consider the merits of an ETF or managed fund that focuses on income.
The following video comes from our free (and very popular) fully online ETF Investors Course. It explains ETFs in detail.
2 ETFs to consider for dividend income
There are many Australian ETFs to consider owning for dividend income, including those from ETF Securities, State Street, VanEck and more. However, in this article, I’ll list two of my favourite ETFs for income purposes:
- BetaShares Australia 200 ETF (ASX: A200). The A200 ETF is designed to give investors exposure to the top 200 Australian companies, measured by their market capitalisation. This includes companies like Woolworths, Telstra, CBA, etc.
- Vanguard Australian Shares High Yield ETF (ASX: VHY). The VHY ETF is designed to give investors exposure to Australia’s largest dividend-paying shares. It also considers forecast dividend yields in weighting the portfolio towards certain shares (i.e. those expected to pay big dividends). Investors should be mindful that sometimes dividend ETFs won’t grow as fast as other ETFs because they can often run the risk of avoiding the fastest growth shares in an attempt to earn more dividend income.
If I could sum it up so bluntly, there are probably two important things for dividend investors to remember:
- You still get your dividends and, if you’re eligible, franking credits.
- Most ETFs are diversified across more than 10 or 20 individual shares, so you can reduce your reliance upon just one company (e.g. a supermarket company) if you invest in a well-run ETF.
Buy, Hold or Sell
All in all, I don’t have any groundbreaking opinions for or against holding Woolworths shares in a diversified portfolio. While I much prefer to invest in very high-quality growth shares (see the report below), there’s a chance I could use Woolies in one of our model portfolios in the future, for its dividend income. However, I’d be more likely to include A200 or VHY as a larger weighting simply due to the diversified on offer.
Both of these ETFs I named here are in Rask Australia’s top 10 ETFs, as part of our Rask ETF members-only research service.
Grab a copy of our free investment report below, available when you create a free account — if you want to know more about the types of companies I like to own in my portfolio.
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