4 reasons why Wesfarmers Ltd is a core stock

Wesfarmers Ltd (ASX: WES) is one of the most widely owned stocks on the ASX with a market capitalisation of $54 billion and over 500,000 shareholders on its register. For comparison, the mighty Telstra Corporation Ltd (ASX: TLS) has a market capitalisation of approximately $63 billion and 1.4 million shareholders.

Like Telstra, the imbedded strength of Wesfarmers’ earnings is highly appealing to any investor looking for core stocks to build the foundations of a rock-solid portfolio.

1)      Maintainable and defensive earnings

While a portion of Wesfarmers earnings are volatile, the influence of these divisions is diminishing as the group’s retail operations continue to expand. The combination of Coles, Target, Kmart, Bunnings and Officeworks draw in around $3.5 billion annually in earnings before interest and tax (EBIT). Importantly the entrenched position of these retailers and their wide customer bases creates a defensive stream of earnings that is matched by only a few other firms including Telstra and Woolworths Limited (ASX: WOW).

2)      Growth

The growth profile of Wesfarmers would appear to be more appealing than many other blue-chips thanks to the firm’s conglomerate structure and the growth potential of the Coles business. Apart from retailing, Wesfarmers also provides shareholders with exposure to resources, chemicals, energy & fertiliser and industrial & safety. The recent performance from these non-retail divisions has been mixed but given their cyclical nature higher earnings can be expected in the future. Likewise, the Coles’ division should benefit from increased efficiencies and store roll-out and upgrade plans.

3)      Dividend

Investors looking for core stocks almost certainly are also after solid and dependable dividends. Wesfarmers has the maintainable and defensive earnings base which allows consistent and growing dividends to be paid to shareholders.

4)      Balance sheet strength and quality management

None of the above matters if a company can’t survive unexpected shocks. The best way investors can be assured a company will survive and prosper is to own companies that are run by competent, able and trustworthy managers who will act in the interests of shareholders. It also means owning companies that have solid balance sheets that can withstand unexpected shocks such as the GFC. Pleasingly Wesfarmers boasts both of these attributes.

Foolish takeaway

While a large company such as Wesfarmers is unlikely to provide the level of capital gains in the future that it has in the past, this should not be a requirement for investors looking for core portfolio stocks. Rather, investors are looking for solid stocks which will provide consistency and certainty with a low level of risk to their capital, something Wesfarmers appears well positioned to provide.

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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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