Looking to buy Woolworths shares as an inflation hedge? Read this first

It’s no secret that inflation has been one of, if not the, biggest concern for ASX investors in 2022. Rising prices have dominated headlines all through this year. Not to mention rising interest rates.

Inflation was once famously described by the legendary investor Warren Buffett as a “gigantic corporate tapeworm”, taking its pound of flesh from all companies in the economy.

In our brave new world of high inflation, conventional wisdom has led investors towards consumer staples shares, such as Woolworths Group Ltd (ASX: WOW), as an inflation hedge. The theory goes that companies like Woolies sell us life essentials. Even though prices are rising, we all need to eat, drink, and keep our houses running.

As such, we’ll all keep shopping at Woolworths and other consumer staples businesses, and pay the rising costs of those essentials. That’s how the theory goes anyway.

We’ve seen more than a few brokers and ASX experts double down on this logic in recent times too. Earlier this month, my Fool colleague looked at broker Citi’s buy rating on Woolworths shares.

This broker reckons Woolies can climb to $39.50 a share over the next 12 months, thanks in large part to “a return to predictable spending patterns”.

But another ASX expert reckons this optimism is misplaced.

Is Woolworths an overrated share when it comes to inflation?

Blake Henricks of Firetrail Investments recently spoke to Livewire about inflation and sectors he’s avoiding because of it. Interestingly, Henricks named supermarkets which, of course, is dominated by Woolies.

Here’s some of what he had to say on why this sector doesn’t quite shape up as an inflation beater:

Supermarkets is a great defensive sector to invest in that benefits from inflation. And if you run a simple model you say, ‘Well, as inflation comes through, the basket goes up. If you hold gross margin percentages flat, gross profit dollars grow and therefore this great earnings growth happens with inflation.’

But the reality is margins are determined by competition and competitive dynamics. And that competitive framework isn’t really changing at the moment. It’s very stable, it’s very good, but our view is that supermarkets aren’t going to be huge winners from inflation. To date, that’s been proven to be true because they’ve struggled to pass through some of those costs and we haven’t seen big earnings upgrades.

And the multiples are fairly extended because people are gravitating towards those defensive sectors. So if there’s one I’d call out, it’d be supermarkets as a controversial loser from inflation.

So there you go, Woolworth is not the inflation slayer that some might initially assume, at least according to this ASX expert.

Only time will tell which ASX experts have made the right call here.

In the meantime, the current Woolworths share price of $35.12 (at the time of writing) gives this ASX 200 consumer sales share a market capitalisation of $42.56 billion, and a dividend yield of 2.62%.

The post Looking to buy Woolworths shares as an inflation hedge? Read this first appeared first on The Motley Fool Australia.

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• Battle of the dividends: Do Woolworths shares pay more than Coles?
• Almost ready to retire? Here’s why I’d buy Coles shares for dividends
• Use the ASX 200 market correction to retire early. Here’s how
• If you bought $15,000 worth of Woolworths shares this year, here’s how much dividend income you’d have
• Markets are nervous. Why waiting to buy these ASX 200 shares could prove expensive

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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