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Why Wesfarmers Limited looks a buy at this share price

Many SMSF investors and others with substantial amounts of capital to invest but little time or inclination to research the high-risk small-cap end of the market will look to blue-chip shares to provide them a return on their investment.

Blue-chip shares are understandably popular with more mature investors as they offer defensive earning streams, reliable dividends, and the ability to ride out serious economic downturns thanks to their generally dominant market positions.

One blue-chip business I continue to like the look of is Coles supermarkets and Bunnings Home Improvement operator Wesfarmers Limited (ASX: WES). It is an investment conglomerate with diverse business interests and an impressive track record of profit and dividend growth since the GFC.

Driving its success has been its dominant and highly-profitable Bunnings business, while it has also posted strong same-store sales growth across its Coles supermarkets thanks in part to the incompetent management of rival operator Woolworths Limited (ASX: WOW).

Wesfarmers is also now looking to replicate its Bunnings success in the large UK home improvement market in a $1 billion investment to acquire the Homebase group before rebranding its stores as Bunnings Warehouses. It is also aiming to lift the low profit margins at Homebase in the same way it has done in Australia to boost group profitability.

Wesfarmers’ Bunnings business contributed $722 million in EBITDA for the six-month period ending December 31 2016, versus a contribution of $920 million in EBITDA from its Coles supermarkets businesses. This demonstrates the sky-high profit margins Bunnings generates for investors when you consider that Coles’ revenues were around triple that of Bunnings over the period.

Outlook

Selling for $44.80 Wesfarmers shares trade on around 16.8x analysts’ estimates for earnings per share of $2.66 over financial year 2017, with an estimated fully franked dividend yield around 5%.

Wesfarmers and its Coles business are likely to face competition from a Woolworths business that can hardly get any worse, while the potential arrival of Amazon in Australia is another competitive risk to watch.

Still for investors focused on income and capital preservation, I rate Wesfarmers shares as a decent opportunity at today’s valuation so long as you take a long-term view.

If you’re prepared to take on more risk and are focused solely on growth over income then the one retail stock to own above all others is probably NASDAQ-listed Amazon.

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Motley Fool contributor Tom Richardson owns shares in Amazon.

You can find Tom on Twitter @tommyr345

 The Motley Fool Australia has no position in any of the stocks mentioned. 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 Bruce Jackson.

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