Chart: The 9 ways Wesfarmers Ltd makes its money

Photo credit: AS 1979

It’s been a bumpy ride for shareholders of Wesfarmers Ltd (ASX: WES) over the last 12 months, over which time the shares have managed to rise a mere 3.7%.

Its performance has by no means been outstanding, but it does compare to a 0.2% decline for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and a 16% decline for rival Woolworths Limited (ASX: WOW).

In other words, it hasn’t been all that bad for Wesfarmers’ shareholders, especially when you consider the additional $2.02 fully franked dividend that has been distributed to shareholders over the duration. That takes total shareholder returns (excluding franking credits) to around 7.6% for the year.

Wesfarmers is one of Australia’s biggest and most widely-held businesses. It pays a generous dividend yield (as we saw above) and enjoys a steady and reliable source of income. The following chart shows how Wesfarmers generated its income over the last 12 months.

Source: Wesfarmers

Source: Wesfarmers

As you can see, Coles and Bunnings make up the vast majority of Wesfarmers’ sales generation, representing 61% and 15%, respectively, for a total of 76%.

Interestingly, however, Bunnings operates on a far greater EBIT (earnings before interest and tax) margin at 11.4%, while Coles operated on an EBIT margin of just 4.7% for the 2015 financial year. As a result, Bunnings accounted for almost 29% of group EBIT, while Coles accounted for 47.4% of group EBIT.

This reflects Bunnings’ dominance in the Home Improvement sector over rivals such as Mitre 10, owned by Metcash Limited (ASX: MTS) and, of course, Woolworths’ failed Masters venture. Meanwhile, Coles’ thin operating margins reflect the high level of competition in the grocery sector, against the likes of Woolworths and German discount retailer Aldi.

Given its sheer size, investors shouldn’t expect Wesfarmers to grow at any astonishing rates in the future. But the company’s history, reliability and strong cash generation suggests it could still make for a reasonable addition to the portfolios of investors looking for income and long-term growth without taking on too much risk.

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Motley Fool contributor Ryan Newman 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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