Why Wesfarmers Limited looks a buy at this share price

Many SMSF investors and others with substantial amounts of capital to invest but little time or inclination to research the high-risk small-cap end of the market will look to blue-chip shares to provide them a return on their investment.

Blue-chip shares are understandably popular with more mature investors as they offer defensive earning streams, reliable dividends, and the ability to ride out serious economic downturns thanks to their generally dominant market positions.

One blue-chip business I continue to like the look of is Coles supermarkets and Bunnings Home Improvement operator Wesfarmers Limited (ASX: WES). It is an investment conglomerate with diverse business interests and an impressive track record of profit and dividend growth since the GFC.

Driving its success has been its dominant and highly-profitable Bunnings business, while it has also posted strong same-store sales growth across its Coles supermarkets thanks in part to the incompetent management of rival operator Woolworths Limited (ASX: WOW).

Wesfarmers is also now looking to replicate its Bunnings success in the large UK home improvement market in a $1 billion investment to acquire the Homebase group before rebranding its stores as Bunnings Warehouses. It is also aiming to lift the low profit margins at Homebase in the same way it has done in Australia to boost group profitability.

Wesfarmers’ Bunnings business contributed $722 million in EBITDA for the six-month period ending December 31 2016, versus a contribution of $920 million in EBITDA from its Coles supermarkets businesses. This demonstrates the sky-high profit margins Bunnings generates for investors when you consider that Coles’ revenues were around triple that of Bunnings over the period.


Selling for $44.80 Wesfarmers shares trade on around 16.8x analysts’ estimates for earnings per share of $2.66 over financial year 2017, with an estimated fully franked dividend yield around 5%.

Wesfarmers and its Coles business are likely to face competition from a Woolworths business that can hardly get any worse, while the potential arrival of Amazon in Australia is another competitive risk to watch.

Still for investors focused on income and capital preservation, I rate Wesfarmers shares as a decent opportunity at today’s valuation so long as you take a long-term view.

If you’re prepared to take on more risk and are focused solely on growth over income then the one retail stock to own above all others is probably NASDAQ-listed Amazon.

Discover 3 More ASX Blue Chips To Buy In 2017

For many, blue chip stocks means stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool's in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool's Top 3 Blue Chip Stocks for 2017."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

If you're expecting to see the likes of Commonwealth Bank, Telstra and Wesfarmers shares on this list, you'll be sorely disappointed. Not only are their dividends growing at a snail's pace, their profits are under pressure too due to the increasing competitive environment.

The contrast to these "new breed" blue chips couldn't be greater... especially the very real prospect of significant share price gains, something that's looking less likely from the usual blue chip suspects.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand - and how quickly the share prices of these companies moves - we may be forced to remove this report.

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Motley Fool contributor Tom Richardson owns shares in Amazon.

You can find Tom on Twitter @tommyr345

 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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