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Should you buy Westfield?

Property group Westfield (ASX: WDC) has for a long time been one of Australia’s largest and most recognised companies, with its dominance in the shopping centre arena and its expanding global presence. With the release of new data revealing that retail sales fell flat in June however, many investors would be asking themselves: Are Westfield’s best days behind it?

The threats

With consumer sentiment proving to be poor – despite interest rates sitting at record lows – and the online retail sector stealing plenty of market share (with more and more consumers expected to switch to online shopping in coming years), it is understandable that investors are wary of buying into the property giant.

First and foremost, investors should focus on the long term when they make investments. That is, they should recognise and take advantage of short-term weaknesses that are pushing the company’s share price down in order to get well positioned in a company for the long haul.

Whilst Westfield relies heavily on the profitability of retailers for its own revenues, it can be expected that lower consumer spending will impact retailers’ earnings over the short term, but it is a factor that companies must simply ride out. When the unemployment rate begins to decrease and confidence returns to the market, the profits of many retailers will likely improve and Westfield should continue to benefit.

Secondly, the online retail sector certainly poses as an enormous threat to traditional brick-and-mortar retailers such as Myer (ASX: MYR) or Harvey Norman (ASX: HVN). As a result, many companies are considering whether to close stores in order to aggressively expand their online presence.

However, there will always be a need for shopping centres. Shopping malls provide a location for socializing, going to restaurants or seeing a movie. They also allow for consumers to physically see what they are wanting to purchase, sample products (such as trying on clothing) and walk away with the product on the day of purchase.

The solution

Since the global financial crisis and in anticipation of the growing threats, Westfield has maintained a heavy focus on strengthening its asset portfolio by selling less profitable locations and expanding or redeveloping its more profitable ones.

Take, for example, the expansion of Westfield Miranda (located near Sydney) and the Garden City shopping centre in Brisbane – which are both owned by Westfield Group and its affiliate Westfield Retail Trust (ASX: WRT) – or its new World Trade Center location, which analysts believe will become the group’s most profitable asset.

Instead of acquiring countless stores to simply make up numbers, Westfield’s strategy to expand more profitable stores to strengthen its asset collection will likely prove to be a very profitable move.

Shareholder returns

Meanwhile the company has also vowed to increase its returns to shareholders through higher dividends. It recently announced a 25.5c interim dividend, which is in line with its aim for a 51c per share dividend for the full year. In comparison, the company only paid out 49.5c per share for the full year last year.

Foolish takeaway

Despite being a part of the top 20 on the ASX, Westfield has enormous growth potential ahead of it and, with its revised business strategy, should prove to increase profits substantially in the long-term. Investors need to look beyond the short-term effects of the economy, to instead recognise the potential that this company holds.

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

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