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Is Wesfarmers a buy?

Wesfarmers (ASX: WES) is one of Australia’s largest companies, with a market capitalisation of $45 billion. For comparison, telecom giant Telstra (ASX: TLS) has a market cap of $58 billion, while supermarket chain Woolworths (ASX: WOW) has a market cap of $40 billion. Wesfarmers is also one of Australia’s most diversified companies; owning a number of businesses in a range of different sectors.

Diversified conglomerate

Wesfarmers operates in five broad divisions which offer shareholders exposure to a number of industries and also safety from a diverse range of earnings streams. Those five broad divisions are:

  • Retailing: Wesfarmers owns some of Australia’s most widely known retailers including Coles, Target, Kmart, Bunnings and Office Works.
  • Resources: Wesfarmers is one of Australia’s largest independent coal producers.
  • Insurance: The insurance division has revenues of around $2 billion, providing insurance and risk management solutions across Australia, NZ and the UK.
  • Chemicals, Energy & Fertilisers: Wesfarmers manufactures and supplies products which are used across resource, industrial, construction, rural and other industries.
  • Industrial & Safety: This division had earnings before interest and tax of $190 million in financial year (FY) 2012 and is a leading provider of industrial and safety products and services.

 

Valuation

Wesfarmers earned $1.839 per share in FY12. According to Morningstar, consensus earnings expectations for FY13 are $1.998 per share and FY14 $2.232 per share. Based on the FY14 estimate this places Wesfarmers on a forward price-to-earnings multiple of 17.5.

Dividend yield

The company paid an FY12 dividend of $1.65. Expectations for dividends in FY13 are $1.80 per share and FY14 of $2 per share. Based on this forecast, at Wesfarmers’ current share price of $39.10, the stock is trading on an FY13 forecast dividend yield of 4.6%, however this rises to 5.1% on FY14 expectations.

Foolish takeaway

When Wesfarmers purchased Coles, there were question marks over whether the return on investment would justify the acquisition price. So far, the company appears to be doing a reasonable job at improving efficiencies and profitability. As one of Australia’s leading companies with a solid and diverse earnings stream, any future price weakness created by the current volatility could provide an opportunity to purchase a market-leading business at a reasonable price.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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