5 valuable charts to see before buying Wesfarmers Ltd shares

Along with holding its annual strategy day briefing in Sydney yesterday, retail conglomerate Wesfarmers Ltd (ASX: WES) also released a 140-slide presentation to the ASX for investors to comb through.

That is certainly a lot of information for investors to cover but I think some of the key messages from the presentation were highlighted in a number of interesting charts.

  1. Wesfarmers is made up of many different parts:
Source: Wesfarmers Presentation

Source: Wesfarmers Presentation

Most investors would be aware that Wesfarmers owns Bunnings and Coles, but as the chart above highlights, it also owns a number of other very diverse businesses.

Some investors find this level of diversification to be a strength of Wesfarmers, but this has also worked against the company more recently. For example, its Target and coal assets have been real underperformers lately and this has reduced the company’s overall returns.

2. Wesfarmers has been a great investment in the past:

Source: Wesfarmers Presentation

Source: Wesfarmers Presentation

Although the very long-term chart above is impressive, returns over the last 10 years have been well below its compounded annual growth rate of 19.7%. That is understandable considering the business is much larger now than it was in the 1980s and 1990s.

The key message for investors, therefore, is not to expect future returns to mirror those of the past. Wesfarmers is a massive company that can’t rapidly increase its earnings like a smaller company can.

3. Coles faces the same problem as its rivals – price deflation:

Source: Wesfarmers Presentation

Source: Wesfarmers Presentation

I think this is an important chart for shareholders of Woolworths Limited (ASX: WOW) and Metcash Limited (ASX: MTS) as well because it is a headwind all three companies face.

While price deflation is good for customers because it results in lower prices at the checkout, it is bad news for supermarkets as it means they need to simultaneously increase volumes to make up for the lower revenues and margins.

Wesfarmers warned that deflation in fresh produce had increased in the second half due to increased supply and this would lead to higher food deflation in the fourth quarter. This comes on top of the price wars it is having with the other supermarkets, which is also having a downward impact on prices more broadly.

4. Bunnings is the superstar of the group:

Source: Wesfarmers Presentation

Source: Wesfarmers Presentation

Wesfarmers’ home improvement segment, driven by Bunnings, has delivered exceptional returns over the past two decades in term of sales and profitability.

This performance is even more impressive when you consider that it has had to compete with Masters over the last few years – although this appears to have had little impact on the business. This should provide investors with confidence that Bunnings will have the ability to compete with any new entrants into this lucrative market.

5. Officeworks is growing strongly:

Source: Company Presentation

Source: Company Presentation

Although Officeworks only makes up a relatively small portion of Wesfarmers’ total profits, it is now starting to become an increasingly important contributor to growth.

As the charts above highlight, Officeworks has an impressive record of increasing sales and earnings and this is being reflected in its steadily increasing return on capital.

Foolish takeaway

There wasn’t a whole lot of new or surprising information from Wesfarmers’ strategy day, but it did provide a good overview of where the company stands at the moment.

There are some really high-quality businesses like Bunnings and Officeworks that are helping to offset the challenges being faced with the Target, coal and industrial businesses.

Wesfarmers pays a pretty attractive dividend but I think this top dividend share is even better. A strong yield and potential for huge share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. 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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