Are Woolworths (ASX:WOW) shares too expensive?

Is the Woolworths Group Ltd (ASX: WOW) share price too expensive today? Its P/E ratio, dividend and other metrics might suggest so

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The Woolworths Group Ltd (ASX: WOW) share price is not having a great day today. Woolworths shares are, at the time of writing, down a hefty 3.67% to $39.89. That contrasts even more poorly with the S&P/ASX 200 Index (ASX: XJO), which is currently up 0.23% today.

Why such a disparate performance for Woolies shares today? Well, it appears to be a reaction to the third quarter update the grocery giant released to the markets this morning. As we dissected earlier today, this update outlined how Woolworths managed to increase sales by 0.4% over the quarter ending March 31 2021. The company also reported that its plans to emerge its Endeavour group division (which houses Woolworths’ bottle shops and pubs business) is on track to proceed by June. Additionally, it announced that its plan to open a new Dan Murphy’s bottle shop at Darwin Airport will be scuppered.

Investors are evidently not too impressed with one or more of these pieces of news today.

But perhaps that begs a deeper question: are Woolworths shares too expensive? They certainly don’t look cheap if we use conventional metrics.

Woolies and its peers

The Woolworths share price currently has a price-to-earnings (P/E) ratio of 35.65, and a trailing dividend yield of 2.53%. Compare that to Woolworths’ rivals in Coles Group Ltd (ASX: COL) and Metcash Limited (ASX: MTS). At current pricing, Coles has a P/E ratio of just 20.71 – and a dividend yield of 3.72% as well. Metcash is sitting on a P/E ratio of 16.16, and a trailing dividend yield of 3.97%.

That looks (and is) far cheaper than Woolworths on a pure earnings basis. Perhaps that is affecting how Woolworths’ shares are responding today. Shares that are priced at relatively high earnings multiples usually are so because the market has placed high expectations on their performance. As a comparison, iShares has the average P/E ratio for ASX 200 companies at the current time sitting at 23.75.

Are Woolworths shares overvalued today?

Well, one broker who doesn’t think so is investment bank Goldman Sachs. According to CommSec, Goldman has retained its ‘buy’ rating for Woolworths shares, and a 12-month price target of $43.60, following the quarterly update. This implies an upside of around 9% on the current pricing. Goldman has based this target on Woolworths’ fundamentals and cash flow estimates.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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