Many analysts and stockbrokers deride conglomerates for being old fashioned and ‘un-focussed’. One of the world’s richest people, Warren Buffett, might not take offense to his Berkshire Hathaway (NYSE: BRK.A) being described as old-fashioned, but I’m sure he would argue with the idea that the conglomerate structure has disadvantaged shareholder returns. Indeed, Buffett would likely argue that it was exactly because of the conglomerate structure that Berkshire has achieved the returns that it has.
While I’m not suggesting Wesfarmers (ASX: WES) is an Australian ‘mini-Berkshire’, it is the largest and most impressive domestic conglomerate and it shares that important conglomerate attribute of diversification. Yesterday’s Strategy Briefing Day presentation, which ran to an exhausting 243 pages, gives investors a feel for just how expansive and defensive Wesfarmers is. With operations in coal mining, Coles supermarkets, Bunnings Warehouse, a large fertiliser business and extensive insurance operations, Wesfarmers many touch points to domestic consumers and commerce.
The defensive nature of many conglomerates creates the ability to pay dividends through all market cycles. (In Berkshire’s case there has been the ability just not the willingness.) Wesfarmers has been in business since 1914 and has a paid a dividend every year since at least 1985.
One of the ‘problems’ conglomerates face is members of the financial community who believe that the sum of the parts is worth more than the whole. This has been a recent issue for Washington H Soul Pattinson (ASX: SOL). Washington has investments spanning from coal mining to telecoms to pharmaceutical retailing. However it is the cross-shareholding in one of Australia’s largest brick makers, Brickworks (ASX: BKW), which has been brought in to question with some investors believing the cross-shareholding should end.
Source: Google Finance
At the end of the day the proof is in the pudding, or rather the proof is in the performance. Compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), over the past 14 years, while the index is up 59%, Wesfarmers is up 162% and Washington a massive 358%.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.