Despite shares in neither company being able to significantly outperform the ASX in 2014, Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) appear to be overpriced at first glance. That's because their P/E ratios currently stand at 17.9 and 21.8 respectively, while the ASX has a P/E ratio of 15.8. Does this mean, then, that they are overpriced? Or, are they still worth buying and holding for long-term investors?
Premium Quality
When it comes to track records, Woolworths and Wesfarmers are hugely impressive. Indeed, a key reason why both companies trade at premiums to the ASX is because of their strong and stable track records of earnings and dividend per share growth.
For example, over the last ten years Woolworths has been able to increase earnings at an annualised rate of 11.2%. This is hugely impressive and has allowed the company to remain generous to investors, with dividends per share rising at a slightly quicker pace of 11.6% per annum over the same period.
The same is true of Wesfarmers, with the owner of Coles increasing its earnings at an annualised rate of 2.8% over the last ten years. Similarly, dividends have increased at a solid 1.9% per annum and, although both of these figures are below those of Woolworths, they continue to attract investors as a result of their consistency over a long period of time.
Looking Ahead
The next couple of years look set to offer yet more earnings growth for both companies, with Woolworths forecast to increase its bottom line at an annualised rate of 5.3% over the next two years. Meanwhile, Wesfarmers is all set to increase its bottom line by an impressive 12.5% per annum over the same time period.
Furthermore, the two companies offer attractive, fully franked yields of 3.9% (Woolworths) and 4.4% (Wesfarmers) and, perhaps more importantly, dividends per share are forecast to rise in real terms. For example, Woolworths is due to increase dividends per share by 5.1% per annum over the next two years, while Wesfarmers' dividends per share are expected to rise by 4% per year over the same time period.
Your Portfolio
Indeed, both stocks seem to offer solid exposure to the Aussie retail sector. Neither is expected to shoot the lights out when it comes to earnings growth potential and yet, if the last ten years are anything to go by, they should prove to be highly reliable. With decent yields, upbeat growth prospects and premiums versus the wider market that can be justified, both Woolworths and Wesfarmers could prove to be solid investments moving forward.
