Retailing giant and conglomerate Wesfarmers Ltd (ASX: WES) enjoys a large part of Australia's retail market. Wesfarmers is the owner of a wide range of businesses such as Coles, Bunnings Warehouse and Target – household names we all love to buy from.
When investors are looking for reliable earnings and dividends over a long-term horizon, they mistakenly assume that larger companies like Wesfarmers are a definite buy. However, investors must be aware that not all market leaders are priced to buy and some may even add more risk to your portfolio. Here are two reasons why I think Wesfarmers is a quality buy-and-hold opportunity, to ensure "safer" portfolio performance for the decades to come.
1. Sale of underwriting insurance operations
Wesfarmers has recently been granted the final regulatory approval needed for the sale of its insurance business, to Insurance Australia Group Limited (ASX: IAG). The $1.845 billion price tag is seen to be a reasonable price in the eyes of many analysts and the approval certainly removes much of the stress felt by investors in the past few months, which was reflected through its weaker share price.
What is important to note however, is that the sale aids Wesfarmers' cash position, which has been slowly building up in the past couple of years. This cash accumulation allows it to undertake more acquisitions in the future, creating potential long-term tailwinds and the chance to explore new opportunities. Furthermore, holding onto cash protects Wesfarmers from the threat of new entrants into the retail market, allowing it to absorb lower margins in the short term to protect its dominant market share.
2. Entrance into new and exciting markets
Supermarket giant, Coles which is owned by Wesfarmers, has recently tried to expand the variety of financial services it provides to its customers. Although Wesfarmers is yet to have applied for a banking licence, it has formed a joint venture with GE Capital to offer services such as loans and credit cards facilities. The aim of this venture is primarily to take advantage of new banking technologies such as "Cardless Cash", attracting younger customers.
To me, this endeavour is a very exciting one for Wesfarmers, as it provides a boost to recent profit margin pressures. It is too soon to know the exact details, but if successful, it will generate some serious returns for shareholders in the future and enable Wesfarmers to capture an even larger portion of the market.
Long-term tailwinds are a vital sign of a company's future growth prospects and Wesfarmers seems to have ticked all the right boxes in this area. Its diverse range of businesses owned also limits the risk of downturns in specific sectors. This is why the recent weakening in the retailing sector has impacted Wesfarmers much less than undiversified retailers such as The Reject Shop Ltd (ASX: TRS).
When weighing up future prospects with its relatively high price-to-earnings ratio of 22.75, it is clear that Wesfarmers has much more room for share price growth and given its outstanding track record of wealth creation, this seems more than likely. To top this off, Wesfarmers offers a juicy 4.2% fully franked dividend yield to support steady capital growth. If you're looking for a solid buy-and-hold investment, then Wesfarmers is the company for you.
