Security price: $28.26
Industry: Retailing
Forecast distribution: $1.39 per share fully franked
Woolworths’ shares have fallen sharply in the past year as investors fretted over the long-term performance of the retailer after a profit downgrade and poor earnings performance.

Those concerns are valid given subdued consumer spending and the competitive ­challenge to Woolworth’s dominance from the likes of Coles. But we don’t believe Woolies’ struggles will be permanent. The company remains a quality business and leveraged to powerful long-term trends.
The share price falls actually provide an opportunity for income investors: Woolworths is now trading well below valuation and offering a healthy 5 per cent dividend yield fully franked.
Woolworths shares traded as high as $38.92 just a year ago. But since then the retailer has disappointed the market. It announced a weak first-half result in February when it also downgraded its full-year earnings guidance to the lower end of market expectations.
Woolworths’ main supermarket operations continue to be challenged by rival Coles. Coles, along with the likes of Aldi and Costco, has managed to win a reputation in shoppers’ minds of low prices that has come at Woolies’ expense.
Another drag on Woolworths’ performance has been its Home Improvement division, which operates Masters and Home Timber and Hardware stores. It has now extended the division’s break-even timeframe beyond its initial 2016 target.
Woolies is responding to these challenges and is focusing on investing in cheaper prices for its customers. Part of that investment will be funded through cost cuts of $500 million.
It is now a turnaround play where the board and management have to restore margins and like-for-like sales growth by re-establishing its reputation for price competitiveness.
Woolworths announced an interim fully franked dividend of 67c a share, up from 65c the previous year. Its forecast total dividend payout for 2015 is $1.39 per share full franked, which gives a healthy prospective dividend yield of almost 5 per cent.
At $28.26, Woolworth is trading below our forecast value of $32.68. That valuation and healthy dividend yield should limit down side in the share price.
Woolworths remains a must have for serious long-term share portfolios, particularly those with an eye to income.