Is the Woolworths Group Ltd (ASX: WOW) share price a buy?
One of the businesses that Berkshire Hathaway investment duo Warren Buffett and Charlie Munger respects the most is Costco, the food giant that operates huge warehouses selling bulk products at attractive prices. Costco is one of the leading retailers in the US.
So you'd think that you could apply a similar level of optimism about Woolworths as an investment. It's Australia and New Zealand's biggest supermarket business, it has useful economies of scale and it has a good logistics advantage compared to its competitors.
Woolworths is on the up again after making some changes a few years ago. Prices were too high and then to counter that it was trying to compete against Aldi on price. That was going to be a race to the bottom.
I like what Woolworths has done under Brad Banducci's leadership with a focus on service, products and improving its supermarkets.
Australian interest rates are lower, so I can understand why investors have pushed the Woolworths share price up 28.3% this year. But at 25x FY21's estimated earnings I'm not sure that Woolworths looks like a good buy today.
Aldi still hasn't finished rolling out its national store footprint, which will at least slow Woolworths growth until Aldi's store count growth slows. Coles Group Limited (ASX: COL) has unveiled an impressive technology, environmental and private brand strategy which could win back customers.
Amazon hasn't done much yet but the potential problem is there. Retail giant Kaufland is also looking to open some stores in the next couple of years. Aussie consumers are going to have more choice. Will Woolworths focus on margin or market share?
Woolworths still has one of the highest earnings before interest and tax (EBIT) margins in the world at 4.7%. It's impressive that it's so high, but how long can it stay like that?
I like the idea of Woolworths working with fast-growing food businesses like Marley Spoon AG (ASX: MMM), but that's not material yet. What's more material is that Big W is still making a loss – although its underlying earnings did improve to a loss of $85 million compared to $110 million in FY18.
Foolish takeaway
The only reason I'd consider adding Woolworths to my portfolio is the idea of a defensive dividend. It has a grossed-up dividend yield of 3.9%. In my opinion, there are quite a few shares out there that offer a better mix of dividend yield and growth than Woolworths with better growth prospects.
