A stock picker’s guide to Wesfarmers Ltd in 2014

A diversified stream of earnings will protect shareholders from a softening coal price.

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With Wesfarmers Ltd (ASX: WES) celebrating its centenary in 2014, it’s a fitting time for investors to look back over the past 100 years and consider the growth the company has experienced.

Having begun in 1914 as a Western Australian farmers’ cooperative (now you know where the name comes from!) the company has evolved and expanded into one of Australia’s largest retailers – it owns Coles, Bunnings, Officeworks, Target, Kmart, Liquorland and Vintage Cellars.

However, unlike most companies which are generally focused on just one industry segment, Wesfarmers is much more than just a retailer and is best described as a conglomerate. Apart from retailing – which of itself spans a range of sectors – the company also boasts businesses as diverse as coal mining, insurance broking, corporate advisory, LPG distribution, fertiliser manufacturing and distribution of industrial, engineering and safety equipment.

Shareholders in Wesfarmers enjoyed a 6.4% increase in earnings per share for the financial year ending 30 June 2013, and the dividend was raised by 9.1% on the previous year to 180 cents per share. On top of the regular dividend shareholders received a juicy 50 cps capital return.

Looking forward into 2014, Wesfarmers recent agreement to sell its insurance underwriting operations to Insurance Australia Group Ltd (ASX: IAG) for $1.845 billion provides the company with significant firepower for acquisitions or to supercharge organic growth. Analyst data provided by Morningstar shows a consensus forecast for earnings per share this financial year of 218.6 cps and dividends per share of 200 cps.

Foolish takeaway

The forecast growth rates in earnings and dividends are impressive and imply a forward price-to-earnings ratio and dividend yield of 19.25 and 4.75%. While the fully franked yield is appealing, the stock does appear fully priced. Investors keen to add this solid blue chip stock to their portfolio may be better off waiting for a more enticing entry point.

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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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