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Why I think the Wesfarmers Ltd (ASX:WES) share price is a sell

With the Wesfarmers Ltd (ASX: WES) share price currently sitting at around $51.30 I think it’s reached the point to sell it.

Ever since the conglomerate announced the plan to split Coles into its own separate entity the share price has impressively gone up nearly 25%. It also announced a number of capital initiatives to add value such as selling its coal assets, selling Kmart Tyre & Auto and ending Bunnings UK & Ireland.

The main question is – do the above moves vindicate a 25% rise in value? I don’t think it does.

There’s no doubt that executing these moves does add value, particularly at this point in the economic cycle with Australian households looking a bit uncertain.

However, Wesfarmers is not a mid-cap business. It is one of Australia’s largest companies.

Once you take all of the divested elements away you are left with Bunnings, Officeworks, Target, Kmart and some industrial businesses.

Arguably in the medium-term Officeworks, Target and Kmart will come under increasing pressure from Amazon and other online competitors. Bunnings is getting a short-term boost from the closure of Masters, but its impressive growth may soon slow down if the Australian house price falls continue. The ‘wealth effect’ can work negatively as well.

Wesfarmers currently offers an attractive grossed-up dividend yield of 6.2%. Whilst the income is attractive I think that’s likely going to be the only returns that investors can make over the next couple of years as the current valuation seems elevated for the future growth on offer.

Foolish takeaway

It’s currently trading at 19x FY19’s estimated earnings. I think it’s better than some blue chips at the current level, but I’d much rather own smaller shares that are growing profit at faster rates.

Stocks like this top growth share which just reported profit growth of 30% last month, which is certainly better than what Wesfarmers is doing.

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It's been a nail-biter of a reporting season here in the first half of 2018.

But the real action, in my opinion, is what companies are doing with dividends.

What does this mean for you? Well there is one stock I've found that could very well turn out to be THE best buy of 2018. And while there's no such thing as a 'sure thing' when it comes to investing - this ripper might come as close as I've ever seen.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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