The Motley Fool

Is Wesfarmers Ltd preparing to do battle with Telstra?

What:  An article in The Australian Financial Review has drawn attention to speculation that cashed up conglomerate Wesfarmers Ltd (ASX: WES) could have run the ruler over Australia’s second largest telecommunications company Optus, which is owned by Singapore Telecommunications Ltd (CHESS) (ASX: SGT).

So what: The speculation is not as far fetched as it might seem. Wesfarmers’ management will currently be assessing the best options for its elevated cash balances which have been boosted thanks to a number of asset sales including the $1.8 billion sale of its underwriting business to Insurance Australia Group Limited (ASX: IAG). The conglomerate certainly has a penchant for owning businesses with stable cash flows and Optus could fit the bill nicely.

Now what: An acquisition of Optus would not only require parent SingTel to be a willing seller but it would also pit Wesfarmers against the mighty Telstra Corporation Ltd (ASX: TLS). Given that Wesfarmers already has the experience of going head-to-head with Woolworths Limited (ASX: WOW) in retailing, it is unlikely that management would be put-off from competing with Telstra.

Whether a large acquisition such as Optus or Healthscope eventuates, given management’s track record investors can have confidence that a focus on shareholder value will be at the centre of capital allocation decisions. Management always has the option of returning cash to shareholders.

With the coal division underperforming and the potential for some form of value accretive capital management, now could be a good time for long-term investors to consider Wesfarmers.

An even better bet than Wesfarmers

The long-term returns from blue chip stocks such as Wesfarmers should be ok, however the potential returns from our #1 ASX pick are even more exciting and it's not too late to buy. The Motley Fool has issued a firm "BUY" rating on this small but ultra promising ASX company… and you can get the name and code FREE right now. Click here for your free copy of "The Motley Fool's Top Stock for 2014."

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

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!