The Wesfarmers Ltd (ASX: WES) share price is a little expensive for me.
Why is the Wesfarmers share price expensive?
For the record, I don't think the Wesfarmers share price is going to crash and burn — far from it. However, I think Wesfarmers is just a little too expensive to make it a blockbuster buy.
In my opinion, Wesfarmers shares are simply not great value today. There are a number of reasons for this:
- Woolworths Limited (ASX: WOW) supermarkets are finally fighting back against Coles. I think this could slow sales growth in coming years as Coles is forced to discount products. Aldi is also growing quickly.
- Bunnings Warehouse's UK and Ireland expansion has only just begun.
- Favourable movements in coal prices boosted profits in the industrials business during its most recent half-year and were the only reason Wesfarmers' profits increased. The problem is the high prices may not be here to stay.
Having said all that, I also think that if you hold Wesfarmers shares from lower prices there are reasons to keep holding them in 2017:
- Diversification. As the owner of Coles, Target, Kmart, Bunnings, Officeworks and an industrials business, there are few ASX companies offering the same diversification as Wesfarmers.
- Dividends. At today's prices, Wesfarmers shares are tipped to yield a dividend of 5.2% fully franked. That's 7.4% grossed up for those tax-effective franking credits.
- Long-term growth. While it is early days yet, the expansion of Bunnings into the UK and Ireland could provide healthy long-term growth. In addition, the sale of Officeworks and the Wesfarmers resources business could unlock value for shareholders over time.
At today's prices, I think Wesfarmers shares are a hold.
