For investors, particularly those with their retirement in mind, buying market-leading businesses with strong and diversified channels of revenue and the ability to maintain and grow their dividends over time is a sensible strategy.
Meanwhile, for investors still some way off from retirement the type of business described above doesn’t just have to include the so-called ‘blue-chips’, it can also include smaller niche players that have the potential to grow into future ‘blue-chips’ such as SEEK Ltd (ASX: SEK) and REA Group Limited (ASX: REA).
However, for investors close to or already in the retirement stage of their lives, the certainty of a consistent income can often become paramount – this is why firms such as Telstra Corporation Ltd (ASX: TLS) are so widely held. Another highly attractive firm to own is Wesfarmers Ltd (ASX: WES). It just released its half-yearly results and increased its fully franked dividend by 10.4%. Here are three reasons Wesfarmers should continue to be a sound investment for many years to come.
1) Retail Supremo
Wesfarmers owns the Coles, Bunnings, Officeworks, Target and Kmart businesses. Each of these businesses commands a significant share of their respective market and it’s hard to imagine that each business won’t be ringing up even more sales and earning even larger profits in the future.
2) Coal upside
Wesfarmers owns and operates the Curragh coal mine in Queensland and has a 40% interest in the Bengalla coal mine in NSW. Although production has successfully been increased, coal prices are depressed which has put a strain on revenues and earnings. To counter this, Wesfarmers has significantly reduced costs and acquired substantial coal reserves adjacent to its existing Curragh mine. While predicting the future coal price is fraught with difficulties, from this point, there could be reasonable upside potential over the long term.
3) Food bowl exposure
There has been plenty of discussion over the years about Australia’s potential to be a ‘Food bowl to Asia’, thanks to our comparative advantage in agricultural production. It is indeed an exciting theme but just how to gain exposure can be a tricky question for investors. Wesfarmers’ Chemical, Energy and Fertilisers division is a significant provider of fertiliser to the agricultural sector and hence offers a way for investors to play this theme.
With numerous divisions providing cash flow to the group, Wesfarmers’ management has the opportunity to grow the company both by re-investing in the current portfolio of businesses, as well as considering acquisitions.
At the same time there is the ability to provide a steady and growing stream of dividends to shareholders. With a market capitalisation of over $50 billion it’s not likely to be a fast grower, however for many risk averse investors, not losing money is the primary aim.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.