After posting a solid set of results last week that included news of the return of around $1.1 billion to shareholders, Wesfarmers Ltd (ASX: WES) saw its share price firm up. Indeed, it is now trading close to seven-year highs and, as a result, many investors are questioning the company's current valuation. However, Wesfarmers could still make higher highs and be worth buying. Here are four reasons why.
- Despite trading on a P/E ratio that is far higher than either the wider index or its own sector, Wesfarmers still appears to offer good value based on the price to sales ratio. While its P/E of 22.3 looks high (a point that I'll come back to a little later), Wesfarmers' price to sales ratio is just 0.9. That's considerably lower than the ASX's equivalent number of 1.7 and shows that there may still be sufficient value in the current share price to warrant a purchase.
- As mentioned, Wesfarmers has a relatively high P/E of 22.3, which is above the ASX's P/E of 16.3. However, Wesfarmers is forecast to deliver very strong growth figures over the next two years, with the company's bottom line due to rise by a highly impressive 17.7% in each of the next two years. Combining this with the P/E ratio equates to a price to earnings growth (PEG) ratio of just 1.25. Although slightly above the key 1.0 level, this again highlights that the company could see its share price make record highs.
- As Bruce Jackson stated in a recent email, Goldman Sachs now believe that interest rates won't rise until the fourth quarter of 2015. This means that Wesfarmers' fully franked yield of 4.3% could remain relatively attractive for a good while yet. Certainly, there are higher yields available, but Wesfarmers has a relatively stable dividend history that looks set to continue and which may attract investors to the stock.
- Of course, in case a 4.3% yield isn't enough, it could be about to get a whole lot better. That's because Wesfarmers is expected to increase dividends per share by 9.9% in each of the next two years. This should ensure that the stock remains highly relevant as a top income play, which could increase demand among investors and push the share price ever higher.
