SHARES

Woolworths versus Wesfarmers shares

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There has been a lot said about the Woolworths (ASX:WOW) versus Coles (ASX:WES) war for a very long time.

Now, with Aldi making big waves in this sector, this battle for consumers' dollars will broaden and intensify. For investors, deciding which company to back is a simple decision - for the moment.

We've compared the stocks and we feel that Wesfarmers is the winner by a margin of one white elephant (Masters) and a risky, unfilled vacancy at CEO level.

woolworths

We've considered several important factors below but, in short, Wesfarmers is the safer option for investors.

Let's take a look at some important differences between the companies:

Woolworths v Coles

Coles is definitely the winner here with stronger earnings growth, with earnings before interest and taxes (EBIT) increasing 6.6% to $1.78 billion during 2014-15 and Woolworths posting more modest 2.1% growth to $3.44 billion on food, liquor and petrol in comparison.

A price war has been firmly in place for some time now, with the two fiercely competing on items such as bread and milk. Margins have been put under pressure by the emergence of Aldi as a strong competitor.

Last year, Woolworths had a margin of 7.9% compared with 4.5% for Coles. Both businesses are likely to see these healthy margins squeezed. This will weigh on the earnings of both Woolworths and Coles.

Bunnings v Masters

Wesfarmers is a clear winner here. When Masters was first proposed, Woolworths realised it would be an initial drain on the balance sheet.

However, the size and length of this drain has been much higher than expected and too much for shareholders, with a $225 million loss on the business reported recently.

It's not until 2019 that Masters is expected to become profitable. In contrast, Bunnings was already a hugely successful business and continues to perform strongly with no brakes in sight.

Management team

Gordon Cairns of Lion Nathan has recently been named Woolworths chairman, which is seen as a positive move. We are still waiting to see who will replace outgoing CEO Grant O'Brien.

If a good candidate can be found, this is likely to lead to a boost in its share price. However, at this stage Wesfarmers wins by default.

Dividends and capital management

Due to the slight outperformance in dividend yield and the potential of a buyback, Woolworths is the winner here.

In fiscal 2015, Woolworths declared a yearly dividend of $1.39 fully franked compared with $2 cents for Wesfarmers. At current stock prices this is equivalent to a dividend of 5.2% for Woolworths and 4.9% for Wesfarmers (though a recent rally in Woolworth's share price has narrowed the difference).

Last year, we saw Wesfarmers delight the market with special dividends and a capital management program. This is a definite possibility for Woolworths if the share price falls back.

Other businesses

Both these companies have significant other interests, including liquor, hotels, petrol and consumer electronics.

While these operations are too in-depth to go into in detail, we can say that Woolworths is the undisputed winner in liquor and gaming through its ALH group investment.

We will call petrol a draw because both companies have struggled, as they have with other retail ventures such as Target and Big W.

Overall, we have Woolworths on top here.

While we believe Wesfarmers is definitely the safer and more prudent choice for investors at this stage, if Woolworths can attract a new, dynamic management team and stem the bleeding from Masters, then the decision could turn after next year's half-yearly results.

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