The BHP Group Ltd (ASX: BHP) share price has outperformed the S&P/ASX 200 (INDEXASX: XJO) (^AXJO) since the beginning of 2019.
Unfortunately, share prices mean just about nothing if you don’t know what the company is worth because you’re essentially flying in the dark on the true ‘value’ of the shares.
The Wall Street Journal says the average analyst price target for BHP shares is $35.41 — around 5% below BHP share price right now. So… maybe it’s a bit overvalued?
I wouldn’t — and don’t — trust other analysts’ forecasts because it’s the assumptions and research that’s important — not the final result. However, sources like the WSJ can be a good resource to get your ‘finger on the pulse’ so to speak.
1 Reason I Would Consider Selling BHP Shares
I don’t own BHP shares in my portfolio. But if I did own them, or Rio Tinto Limited (ASX: RIO) shares, I would consider selling.
Why?
Well, when I look at a company like BHP the only appeal I see in it is its dividend yield. It’s a great company, don’t get me wrong.
But given the amount of complexity in the business, the many moving parts and it’s vulnerability to commodity prices, it quickly becomes a very difficult business to model.
When an analyst arrives at a valuation using his or her model, he should input things like prices of iron ore, copper, coal… etc as well as costs and corporate overheads. But unlike a normal business, such as, say, Telstra Corporation Ltd (ASX: TLS) — better still – CSL Ltd (ASX: CSL), the prices of BHP’s products and therefore it’s profits can swing wildly from one year to the next.
Its dividends are more consistent and more reliable.
However, if your only focus is dividends and income, I would suggest it is far more prudent to consider a low-cost ASX Exchange Traded Fund (ETF) or index fund that yields just as much as BHP shares.
Just about any ETF that tracks the ASX 200 should be yielding over 4% today, given the index’s heavy tilt towards dividend shares like Commonwealth Bank of Australia (ASX: CBA) and BHP.
The key reason for buying an ETF like this is that it helps you to mitigate the risk that commodity prices turn against you or that BHP or any individual share in the ASX 200 suffers a meaningful setback to its operations.
That’s why I own an ASX 200 ETF and not BHP shares.
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