Wesfarmers Ltd (ASX: WES) has gone through massive changes over the last 18 months, with the demerger of its most well known division, Coles Group Ltd (ASX: COL), in 2018.
In fact, Wesfarmers’ decision to spin-off of Coles has proved to be a highly beneficial move for the company, with the Wesfarmers share price rising 34% in the last 12 months. As the Wesfarmers share price has risen, the dividend yield has fallen somewhat, but it still pays an attractive dividend of 4.15% that is fully franked.
So, what does Wesfarmers do?
Wesfarmers has grown from its origins in 1914 to become one of the top 10 ASX shares by market capitalisation.
One of Wesfarmers’ core strengths is its proven track record in investing in lucrative new areas across a wide range of market segments.
Wesfarmers is a highly diversified business with operations in general retail segments including home improvement and outdoor living, apparel and general merchandise and office supplies, as well as industrial segments with operations in chemicals, energy and fertilisers, and industrial and safety products.
Up until the demerger of Coles in 2018, Wesfarmers was Australia’s largest listed company by revenue, although Wesfarmers still owns around 15% of Coles.
Wesfarmers subsidiaries include household names such as Bunnings Warehouse, Kmart Australia and Officeworks, and online retailer division Catch.
Clever diversification and acquisitions – the key to Wesfarmers’ success
Diversification across a very broad spectrum of the Australian economy is Wesfarmers’ core strength, as it provides a buffer to any industry-specific challenges that could potentially negatively impact any of its subsidiaries.
Washington H. Soul Pattinson & Co. Ltd (ASX: SOL), or ‘Soul Patts’, is another ASX 100 share with a similar strategy, although it has a much lower market capitalisation than Wesfarmers. There is no doubt that Soul Patts is a great company, however, one of the distinct advantages that Wesfarmers has over it in my opinion is its larger revenue stream. This gives it more options in terms of the types and size of companies that it can acquire, as well as its capacity to better absorb any loss-making divisions.
Wesfarmers has a strong track record of not only acquiring good quality businesses in a diverse range of segments, but also of its ability to time the selling of any operations that no longer to continue to produce strong long-term returns for its shareholders. Examples of this include its decision to pull out of its unsuccessful Bunnings divisions in United Kingdom, the divestment of its coal divisions, and its exit from Kmart Tyres and Auto Service in 2018.
Throughout 2019, Wesfarmers has made a few acquisitions, including a lithium producer, Kidman Resources. Lithium is an essential ingredient for the hi-tech sector such as electric vehicles, so this acquisition positions Wesfarmers well to tap into this rapidly growing market segment.
Core divisions continue to grow strongly
Wesfarmers’ highly successful Bunnings divisions continues to benefit from improved supply chain efficiency and store technology upgrades.
Officeworks continues to grow solidly, driven by new and expanded product ranges and changes. Wesfarmers continues to adapt its strategy to remain relevant to its customers in light of the looming competitive threat of Amazon Australia, with its highly efficient online business model.
Foolish bottom line
Purchasing Wesfarmers shares gives instant access to a diverse portfolio of high-quality companies, driven by a quality and experienced management team.
However, with such strong growth in 2019, its price-to-earnings ratio of 25.2 is looking rather high for a defensive style share, so I would only be looking to buy Wesfarmers shares to build up a portfolio of shares from scratch, or to add some further diversification with a long-term outlook in mind.
The post Is it still worth buying Wesfarmers shares? appeared first on Motley Fool Australia.
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Motley Fool contributor Phil Harpur has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020