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How Wesfarmers will grow even bigger

By any measure, Wesfarmers (ASX: WES) is a huge company. Its market cap is nearly $50 billion. It owns and operates the other half of the nation’s supermarket duopoly: Coles. Its interests span nearly ever sector of the economy, from retail and resources to insurance and asset management.

By revenue, it’s now Australia’s second largest company, ranking behind mining giant BHP Billiton (ASX: BHP) and ahead of competitor Woolworths (ASX: WOW).

Investors, understanding that ‘trees don’t grow to the sky’, might well ask how such a huge company could grow in the months and years to come.

Huge outperformance… can it continue?

Sure, Wesfarmers shares have risen 40% in the last twelve months, outperforming the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) by a wide margin, as the chart below shows. But most importantly, what’s next for this giant?

Wesfarmers outperforms S&P:ASX 200 2013

Actively freeing up capital

Wesfarmers famously acquired supermarket chain Coles in 2007 for some $20 billion. Today, Coles contributes over half of the conglomerate’s overall revenues and represents a significant growth engine for the company — with sales rising 5.3% in the most recent quarter over the corresponding period in 2012. (However, this acquisition is also credited with causing Wesfarmer’s ROE to plummet.)

On Wednesday, Wesfarmers freed up about $400 million in capital by selling off 75% of its stake in 19 Coles-owned shopping centers in a joint venture with ISPT, an unlisted Australian property fund manager, and additional deals could be in the works.

You can bet, in any case, that Wesfarmers’ management will be looking for a good return on this newly freed-up cash. With an overall cash horde in the $3 billion range, could another big acquisition be in the works?

“There has been speculation Wesfarmers may have an interest in Coates Hire”, as The Australian reported yesterday.

Meanwhile Wesfarmers CFO Terry Bowen has said an airline acquisition is definitely off the table. Still it seems the company is keeping a relatively open mind, as it seeks to keep shareholders happy, about other possible acquisitions and ventures.

Foolish takeaway

It takes a lot to move the needle for a massive company like Wesfarmers, so an acquisition would need to be quite a large one. Coates Hire, as Australia’s largest equipment hire company, is one intriguing idea.

Surely one source of reassurance for shareholders, in the meantime, is the company’s fully franked dividend, currently in the 4% range.

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. Take Stock is 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.

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