The ALGO engine triggered a buy signal on WOW at yesterday’s close at $25.10.
This is purely a technical signal. However, with the dividend yield close to 3.8% with the price at $25.00, it looks like a reasonable defensive stock in an uncertain market.
We’re looking for a price recovery to the $27.00 area to take profits or write covered calls to enhance portfolio returns.
Woolworth’s
Recent price action in the local ASX market suggests we’ve entered a period of heightened volatility and potential for downside risk. Since posting the high for-the-year at 5945.00, the index for Australian shares has dropped almost 4%.
Looking across the spectrum of ASX top 100 stocks, we have found several names which can offer defensive value in a broadly sideways to lower share market.
These include: IPL, MPL, WOW, CTX, QBE, SHL, SYD, TCL, AMC, and IAG.
We consider these stocks to have the potential for moderate capital growth and, combined with a buy/write strategy, will offer 10 to 12% cash flow on an annualized basis.
ASX: XJO Index
Within a back drop of equity market volatility, Telstra and Woolworths look like a safe harbour for client portfolios.
We see 5 – 8% upside for capital gain plus upcoming dividends in Aug/Sep.
WOW has reported very strong Aust Food sales for the 3Q17.
If we assume FY18 revenue of $57b, EBITDA $3.5b, Net Profit $1.55b and dividends increasing from $0.70 in FY17 to $0.80 cents in FY18, it places WOW on a forward yield of 3%.
Based on the above metric, we think WOW is now fully valued and investors should add a covered call above the market to enhance the return.
Woolworths trading back to $25.50 looks like reasonable value. We’re buyers on a dip in the share price at or $25.50. We see scope for 5% underlying EPS growth and when complimented with a covered call option, we’re generating 10%+ in annualized cash flow from the dividend and the call option income.
CCL is another name that we’ve been buying the stock at or near $10.00 and selling tight covered call options to generate 10 – 12% annualized cash flow .
Even though Woolworth’s first-half profit outperformed rival Coles for the first time in seven years, the group’s earnings fell short of the street’s expectations.
For the six months ending December 31st, the group announced a profit of $725 million, up from a $972 million loss during the same time last year. market analysts were expecting a profit number of over $800 million.
Despite the solid earnings growth, the company cut its dividend to 34 cents per share, compared to 44 cents in the corresponding period last year. The street was expecting a dividend of 45 cents per share.
We’ve been selling European covered calls over WOW for an additional $0.72 per share credit, lifting the annualized yield to over 10%.
Woolworths has recently sold their petrol business to BP for $1.8b which helps to underpin the groups balance sheet. As a result, we’re likely to see Woolworths accelerate their store refurbishment program.
In late February we’ll see the earnings update from Woolworths and based on consensus numbers we expect $58b in revenue, EBIT of $2.5b with reported profit around $1.5b.
On a forward basis the underlying earnings growth should track around 4% with FY18 EPS of $1.30 and DPS $0.88, this will place the stock on 3.7% yield.
Any rally in the share price following the Feb result, we feel adding a covered call at or near $25 – 26.50 offers a suitable risk reward payoff.
Woolworths has rallied from the November $22.20 support level. Based on consensus earnings the stock trades 18.5 times FY17 earnings and 3.8% dividend yield.
The earnings update in Jan/Feb will provide greater clarity on the turnaround following the Masters business failure and the refocus on Woolworth’s traditional food and liquor business.
The following group of stocks are in either established uptrends or, in recent months they’ve broken downtrends to begin building the early stages of a bullish “higher low” formation.
Many of these names have been mentioned previously in the blog and/or the monthly strategy video report. It’s worth loading these codes into your watch list and considering rebalancing your portfolio to include allocations towards some, or all of these names:
JHX, LLC, MQG, SHL, TWE, ANN, ANZ, ASX, CCL, CIM, COH, QUB, TAH, WOW & WPL.
With the lower growth names within the above basket, such as WOW & CCL, we compliment the position now with tight covered calls to enhance the yield to 10%+ per annum. With some of the other names, we give a little more breathing space as we expect 5 to 10% price appreciation before selling the call option overlay.
Woolworths (WOW.ASX) EBIT was down 36% to $2.5b from the same time last year. NPAT (normalised) was $1.55b and NPAT, on a reported basis including write downs, came in at a loss of $1.2b.
FY17 food & liquor should begin to show positive growth and based on FY17 EPS of $1.20 and DPS of $0.80, Woolworths is now trading on a forward yield of 3.3%.
We see Woolworths breaking out of the 18 month downtrend and beginning a new technical structure of higher highs and higher lows. We collected call premium over recent time and intentionally left the stock uncovered coming into this result. With the stock now back at our fair value target, we look to sell covered calls at or near the $26 range into November or December.
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