Wesfarmers Ltd (ASX: WES) is often regarded as one of the best blue chips on the ASX. Can the Wesfarmers share price rise above $50 in 2020?
Investors have sent the Wesfarmers share price flying over the past year despite the demerger of Coles Group Limited (ASX: COL). Over the past year the Wesfarmers share price has gone up 30%. It would only take a rise of another 19% over the year to reach $50.
How likely is a rise of 19%?
Share prices will follow earnings over the long-term. Wesfarmers' earnings are much higher than at the start of the century, but it's very unlikely that we'll see a 19% rise in earnings in FY20.
In FY19 Wesfarmers managed to grow its continuing net profit excluding significant items by 13.5%. Bunnings delivered an impressive earnings before interest and tax (EBIT) growth contribution of 8.1%.
I think Bunnings' growth in FY20 will be another single digit number. Considering Bunnings' profit contribution was more than half of Wesfarmers' overall EBIT in FY19, Wesfarmers' overall organic EBIT growth is probably going to be in the single digits too.
But, share prices are also be affected by other economic changes like interest rates.
Wesfarmers shares have been a beneficiary from the RBA lowering interest rates. Investors are looking for yield and Wesfarmers is a solid pick for yield with a focus on shareholder returns.
One of the main things that is attractive about Wesfarmers is that it isn't a bank. As funny as that sounds, the big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Group (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) are facing a number of issues including continuing remediation. Plus, their dividends are going lower.
Telstra Corporation Ltd (ASX: TLS) is another business that is facing earnings pressures and is seeing dividend cuts. It isn't the dividend share that it used to be.
Wesfarmers could be the best choice for yield in the ASX 20.
However, the RBA has already sent the Australian interest rate to record lows. It would probably take at least two more cuts for investors to hunt for yield even harder.
Foolish takeaway
Wesfarmers is trading at over 24x FY20's estimated earnings, which is pretty pricey. It also has a projected FY20 grossed-up dividend yield of 5%. I'd prefer to buy Wesfarmers shares over most other blue chips for income, but I think there are better dividend shares at better value on the ASX.
