I've owned Wesfarmers Ltd (ASX: WES) shares for many years now, and I have no plan to sell out.
In my view, Wesfarmers is one of the ASX's best companies and long-term investments. It owns a sprawling empire of underlying businesses, all of which contribute to its overall quality.
There's the crown jewel of Wesfarmers' portfolio: Bunnings Warehouse, of course. But Wesfarmers also owns the popular discount chain Kmart, its sibling Target, and the largest office supplies provider in the country, OfficeWorks.
But these top, 'household name' companies are only the tip of the Wesfarmers spear.
Wesfarmers owns an array of additional businesses that cover almost every corner of the Australian economy. There's gas supplier Kleenheat, workwear brands King Gee and Hard Yakka, CSBP Fertilisers, CSBP Ammonia, Ammonium Nitrate and Industrial Chemicals, and Australian Pharmaceutical Industries, owner of pharmacy chain Priceline. Among others.
With this diversified stable of quality companies all under the Wesfarmers roof, you can see why I'm happy to own shares of this company.
In fact, I'd love to buy more Wesfarmers shares.
But I haven't for a while and don't plan on doing so anytime soon.
Why? Well, I simply view the Wesfarmers share price as too expensive right now.
The conglomerate has had a stunning year in 2024. It has climbed from the $57.50 it started the year at to the $73.17 we see today (at the time of writing anyway), a gain worth 27.2%. It has also jumped 31.8% since this time last year.
See for yourself below:
Image source: Getty Images
Why are Wesfarmers shares too expensive to buy?
These stunning gains have come at a cost. Wesfarmers had a decent 2024 financial year. But, as we covered in August, the company only managed to grow its earnings per share (EPS) by 3.6% over the 12 months to 30 June to 225.7 cents per share.
Given its share price has gained more than 31% since this time last year indicates that most of this company's share price gains have come from an expansion of its price-to-earnings (P/E) ratio, rather than from the company's growing profitability.
In other words, investors are simply prepared to pay more for one share of Wesfarmers than they were a year ago.
That's why, today, we see the company on a relatively lofty P/E ratio of 32.33.
For some context, global payments giant Visa currently trades on a P/E ratio of 31.84. Google-owner Alphabet is on 24.99. If you think that means that Wesfarmers shares are more expensive than Visa or Alphabet, you'd be right. Yet, it's pretty clear that both of these companies have far more growth ahead of them than Wesfarmers, given their global market power and reach.
Let's look at this scenario from a different angle. Right now, Wesfarmers shares are trading on a trailing dividend yield of 2.71%. Yet, if you'd bought this company a year ago, you would have enjoyed a dividend yield of 3.57% over the past 12 months. Again, this tells us that Wesfarmers' 2024 share price gains have not come from its fundamentals improving too much.
Foolish takeaway
Any way you slice it, Wesfarmers stock looks prohibitively expensive right now. I like this company too much as a long-term investment to sell out. But it would have to fall considerably from its current heights before I add any more shares to my portfolio.
