Currently, the Wesfarmers Ltd (ASX: WES) share price looks to be trading slightly below fair value, so it may not be a standout buy.
Should buy Wesfarmers for its dividend?
As the owner of Coles, Bunnings Warehouse, Kmart, Target and more, there is a lot to like about Wesfarmers. Over the past decade, Coles and Bunnings Warehouse have fired on all cylinders while Kmart and Target played their part.
According to Morningstar data, the company has achieved a compound total return of 6.4% per year over the past 10 years. Dividends are up, too, which makes it a tempting play for investors focused on income. At today's prices, it is forecast to pay yearly dividends equivalent to 5% fully franked.
In coming years analysts expect Wesfarmers to continue its recent growth, with dividend increases and profit growth forecast for the next two years. Despite this, just three of the 15 analysts which follow Wesfarmers believe it is a buy at today's levels, according to The Wall Street Journal.
The average price target is $42.23.
Using its dividends as a guide to its valuation, the analyst price targets assume the company will grow its payments to shareholders at a rate of around 2.2% per year, which is broadly in-line with its historical average.
At today's market prices of around $41, Wesfarmers shares are clearly not a bargain, unless they can grow their free cash flow and dividends greater than they have done in their recent past.
I find that unlikely given that Coles, still its number-one business by sales and profit, is facing stiffer competition. While Kmart and Target must contend with Amazon.
While Bunnings Warehouse is charging ahead locally, it already is the dominant player in the market and was forced to take its business to the UK and Ireland for longer-term growth. There is plenty of potential overseas, but the company is unlikely to realise material gains from its expansion anytime soon.
Foolish Takeaway
Wesfarmers is a great business yet its shares do not appear to be a bargain investment at today's prices. However, given that its success is no secret, chances are, we will not get an opportunity to buy Wesfarmers shares at bargain levels until the next market crash.
Fortunately, there are many other quality ASX shares available…
