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Can Wesfarmer’s back up its stunning 2020
Wesfarmers Ltd (ASX: WES) is one of the best ASX blue chip shares around in my opinion.
It’s one of the oldest businesses on the ASX and I think it still has plenty of growth potential for the long-term.
These are the reasons why I really like it:
Strength of businesses
The portfolio of businesses that Wesfarmers currently owns are really good in my opinion.
When you look at Bunnings, it’s the largest hardware chain in Australia. It makes an excellent return on capital (ROC) for Wesfarmers and generates the most amount of operating profit for the company. Bunnings is also diversifying with acquisitions such as Beaumont Tiles. It’s also aiming for a greater market share of trades customers.
Officeworks is the market leader in office products in Australia. It has been benefiting from the need of people for home learning and working at home. Technology will continue to be important for students and businesses for a long time.
Kmart is probably the best department store business in Australia.
Catch is a rapidly growing online retailing business that has a lot of potential in the coming years.
Wesfarmers’ industrial and safety and WesCEF businesses are also solid performers.
Looking at return on capital for FY21, Bunnings’ ROC was 82.4%, Kmart Group (includes Target and Catch) ROC was 52.1% and Officeworks ROC was 22.3%. Those are impressive numbers.
Diversification options
I’m really attracted to the fact that Wesfarmers can decide to invest into whatever industry it wants to.
For example, it has invested into lithium with its involvement with the Mt Holland project. This could be a good earner for Wesfsrmers in the coming years. It gives it exposure to a new age industry.
The company also is sniffing around the Priceline Pharmacy business Australian Pharmaceutical Industries Ltd (ASX: API).
Over time, the blue chip ASX share can invest in and divest different businesses and industries within its portfolio. This should future-proof the business.
Commitment to shareholder returns
Wesfarmers has a healthy dividend payout ratio for shareholders. It pays a solid income whilst also retaining some capital for more profit. In FY21 it paid a dividend of $1.78 per share (up 17.1%), whilst underlying profit/earnings per share (EPS) was $2.14.
But, due to the fact that Wesfarmers now has so much capital on its balance sheet, the board has recommended a $2 per share return of capital as well.
Capital growth and dividends is a good combination.
Final thoughts on Wesfarmers and the share price
Wesfarmers is a great blue chip ASX share. I’d be happy to own it and keep it in my portfolio. It looks better value after a 14% drop from 20 August 2021.
But I still wouldn’t count it as great value considering sales are declining compared to the incredible FY21. CommSec puts it at 29x FY22’s estimated earnings. There may be some other ASX dividend shares that are better choices.
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