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Why I think Wesfarmers shares are a buy

Matthew Donald
dice labelled buy and sell rolling on a sharemarket chart

The Wesfarmers Ltd (ASX: WES) share price has increased by more than 35% in the past year. This exceeds the return of the S&P/ASX 200 (INDEXASX: XJO), which has returned 19%. Wesfarmers controls well known household names including Bunnings Warehouse, Officeworks, Kmart and Target.

Reasons for Wesfarmers outperformance

Wesfarmers delivered impressive FY19 results, with revenue up 4.3% to $27.9 billion, net profit up 13.5% to $1.9 billion and paid out dividends of $2.78 per share (including a $1.00 special dividend).

The company has engaged in corporate activities, including the demerger of Coles Group Ltd (ASX: COL) while maintaining a 15% stake in the supermarket giant in FY19. Michael Chaney, Chairman of Wesfarmers in the 2019 Annual Report states:

The Board considers the Group to be well positioned for future growth in its existing businesses with the balance sheet capacity to expand its operations and move into new fields where the potential returns justify investment.

I agree with this statement from Chaney – the demerger allowed Wesfarmers to reduce debt by $1,464 million to $2,116 million, increase returns to shareholders (19.2% return on equity in FY19) and free up capital to improve its flexibility to make acquisitions to provide a suitable return to shareholders. and Kidman Resources are the company’s most recent acquisitions that look set to increase value.

The acquisition has enabled Wesfarmers to expand the stock it is selling, assist Kmart and Target with their online presence and comes with an extensive user base. I believe this is an intelligent move to future proof the business against online competition from Ltd (ASX: KGN), eBay and Amazon, just to name a few. The traditional brick-and-mortar stores are losing sales, with tech-savvy consumers price comparing before purchasing online rather than going into a physical store.

In addition, Bunnings have recently created an online offering called Bunnings MarketLink. The company highlights this will have a “wide offer of products…to complete your home improvement and lifestyle needs” on their website. This online presence will improve consumer choice and flexibility.

Wesfarmers’ other acquisition, Kidman Resources, is a lithium producer. The rationale behind this purchase was to invest in the future of electric cars, which are powered by lithium batteries. With the rapid growth of the sale of electric cars this investment appears to be for the long term and recognises the growing global concern about climate change. Wesfarmers have the capital to invest in the growth of Kidman Resources to ensure future success and maximise value for shareholders as the demand for lithium explodes over the long term.

Foolish takeaway

The Wesfarmers share price has just hit a 52-week high of $43.63 per share at the time of writing. With the long-term outlook of the stock looking positive due to the company’s recent acquisitions, I would say Wesfarmers shares are a buy for investors who take a long-term buy-and-hold approach.

The company has a great track record of growing and turning around businesses and delivering great returns to investors through capital returns, dividends and demergers. While waiting for the acquisitions to bear fruit, Wesfarmers pays a juicy dividend yield of 4.08%, which is considerably better than the interest rates offered by the banks.

The post Why I think Wesfarmers shares are a buy appeared first on Motley Fool Australia.

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Motley Fool contributor Matthew Donald owns shares of Wesfarmers 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