5 reasons to stick with your Wesfarmers Ltd shares

Photo credit: AS 1979

The share price performance of Wesfarmers Ltd (ASX: WES) hasn’t exactly been spectacular over the past year with the stock down 7%.

Despite the decline, Wesfarmers has still outperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) which has experienced a fall of 12%.

When you consider the drag on earnings the group has had to contend with from the slump in coal prices, this relative outperformance is all the more impressive.

Importantly, there are a number of reasons for shareholders to be optimistic about the future. Here are five to consider:

1. Coles – The food, liquor and petrol retailing giant continues to grow its earnings. For the six months ending December 31 2015, earnings before interest and tax (EBIT) increased by $50 million to $945 million.

2. Bunnings – Having seen off competition from a cashed-up Woolworths Limited (ASX: WOW), which recently announced that it would seek to sell or close Masters Home Improvement, Bunnings is now in an even stronger domestic market position.

The potential to replicate this domestic success in the UK via the recent acquisition of Homebase provides an exciting launching pad into what could become a major growth avenue for the group.

3. Target – The divergence between the performance of Kmart and Target is stark (both discount department stores are owned by Wesfarmers). This situation provides plenty of turnaround potential for the Target business which currently has an EBIT margin and return on capital (ROC) of just 3.8% and 3.8% respectively, compared with a margin of 11.6% and 36.6% at Kmart.

4. Coal – While few analysts are predicting a near-term rebound in coal prices, a resetting of the cost base and an improved exchange rate and currency hedge position have the potential to improve the future performance of this loss-making division.

5. Dividends – with a trailing dividend of 202 cents per share, the stock is trading on a fully franked yield of 4.9%.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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