Woolworths’ Interim Dividend Up 18%

Narrow-moat Woolworths’ WOW first-half fiscal 2023 sales growth of 4% and 16% increase in underlying EPS were ahead of our expectations. We increase our fair value estimate by 2% to AUD 27 per share, due to a now slightly greater sales base for the core Australian food segment, which accounts for over 80% of group earnings. We increase our fiscal 2023 adjusted EPS estimate by 4% to AUD 1.41.

Inflation is driving up food retail industry sales by more than we had anticipated, and Australian major supermarket chains haven’t seen customers meaningfully cutting back on their shopping. Rather, Woolworths is gaining share from specialty retailers, with beauty one of its highest growth categories. However, within the Australian food retailing sector, Woolworths is losing market share. First-half food retailing segment sales grew by 2%, below the industry’s 6% growth rate and lagging main competitor Coles at 5%. We increase our fiscal 2023 group revenue estimate by 2%.

The unwinding of COVID-19-related costs boosted group profit growth well ahead of sales growth. Some AUD 240 million in direct COVID-19 costs incurred in the first half of fiscal 2022 didn’t repeat. First-half adjusted EBIT increased 18% and the board declared a fully franked interim dividend of AUD 0.46 per share, also up 18% on the previous corresponding period.

The improvement in the underlying profitability of Woolworths’ operations was less impressive. Without the benefit from nonrecurring COVID-19 costs, EBIT increased by 4%, broadly in line with group sales growth.

Shares in Woolworths continue to screen as overvalued, and a relatively weaker second-half result could act as a catalyst for a derating in the share price.

We anticipate the next six months to be more challenging for Woolworths, despite a solid start to the second half with food sales up 7%. We expect the benefit from the removal of COVID-19 costs to be less impactful in the second half.