There are plenty of reasons Wesfarmers Ltd (ASX: WES) deserves top spot this week and while points two, three and four are all important and offer compelling reasons why Wesfarmers is a true blue-chip stock, it's point one which is the most exciting.
1) It's raining cash!
Wesfarmers has just announced the sale of its insurance broking and premium funding operations for $1 billion to a US-based firm, surprisingly neither Austbrokers Holdings Limited (ASX: AUB) nor Steadfast Group Ltd (ASX: SDF) were the acquirers. Speculation that this sale was imminent has been building since Wesfarmers offloaded its underwriting business to Insurance Australia Group Limited (ASX: IAG) late last year for $1.8 billion.
Summed up, Wesfarmers is raking in close to $3 billion from recent asset sales. While the sale of these divisions obviously lowers the recurring earnings base, how these funds are deployed is key. Shareholders could be in for a windfall in the form of higher dividends, special dividends, capital returns or share buybacks. Alternatively, management may look to redeploy the funds either by reinvesting them in the remaining divisions or via acquisitions.
2) Kmart a winner. Target next.
The turnaround in Kmart's performance has been exceptional with the discount department store achieving a Return on Capital (ROC) almost as high as Bunnings. In contrast fellow retail brand Target is languishing with a ROC of just 1.9%. There is obviously significant scope for management to improve earnings at Target, given the success at Kmart there is reason to believe a profit-improvement strategy can be achieved at Target too.
3) Bunnings and its salivating margins
Despite facing a new competitor with deep pockets from the Woolworths Limited (ASX: WOW) owned Masters Home Improvement chain, Bunnings continues to be the jewel in Wesfarmers' crown. Masters doesn't appear to be taking market share from Bunnings which is good news for shareholders and suggests the high returns from the division can continue.
4) Coles continues its evolution
Metcash Limited (ASX: MTS) is finding out the hard way just how difficult it is to compete with the two major supermarket chains. While critics will (perhaps rightly) argue that the turnaround of the underperforming Coles business has taken too long and cost too much, there are clear signs that the reinvigorated offering is starting to gain traction and boost returns.
Foolish takeaway
Patiently waiting for an opportunity to add quality stocks to your portfolio is not easy when the noise of the stockmarket encourages investors to constantly "do something". While Wesfarmers may not be priced to buy at the moment, that can change quickly during a correction.