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Does Wesfarmers Ltd’s 5.2% trailing yield make it a buy?

Last week, Telstra Corporation Ltd’s (ASX: TLS) management surprised the market with a black swan event which caught investors off guard – a cut to its “reliable” 15.5 cent semi-annual dividend.

Although CEO Andy Penn tried to soften the blow by paying out one final 15.5 cent dividend this half, investors were less than impressed by the fact that even after the payment of anticipated special dividends, the telco’s total forecast dividends for the 2018 financial year will be around 22 cents per share.

Whilst the move to cut its dividend is a natural outcome of increasing competition from new players Amaysim Australia Ltd (ASX: AYS), TPG Telecom Ltd (ASX: TPM) and Kogan.com Ltd (ASX: KGN), and a maturing industry profile, investors were nonetheless left reeling as Telstra’s share price shed almost 11% (and counting) in the space of three days followings its 2017 full-year results.

Accordingly, although Friday’s closing share price of $3.90 represents a robust 5.6% forecast yield (if maintained), I think investors looking for reliable income are better off looking elsewhere.

Wesfarmers Ltd (ASX: WES) is one stock which comes to mind. Here’s why.

Why Wesfarmers?

As I wrote here earlier this year, Wesfarmers is a resilient conglomerate business comprising industrial, retail and financial services divisions.

Whilst the bulk of attention is generally on its largest business unit – Coles supermarkets – the West Australian behemoth has many other divisions which insulate it from a severe downturn in any sector. Its 2017 full-year results is a testament to that fact.

2017 results

Last Thursday, Wesfarmers handed down its 2017 full-year results to reveal underlying profit growth of 28% to $2.87 billion. Earnings per share swelled to $2.54, driven by a turnaround in Wesfarmers’ resources businesses.

Wesfarmers’ key retail divisions Kmart, Bunnings and Officeworks demonstrated continued earnings improvement, despite weakness in its Coles division. Nevertheless, a sharp rebound to earnings in Wesfarmers’ resource business (led by a strong rally in coal prices) allowed management to hike up Wesfarmers’ final dividend to $1.20 per share.

This represents a massive 26% increase on prior year, placing the company on a solid 5.2% trailing yield at its most recent price of $42.50.

Accordingly, given the prospects of capital growth to Wesfarmers’ share price, especially if its Coles business regains momentum against Woolworths Limited (ASX: WOW) and Metcash Limited (ASX: MTS), I think Wesfamers is a more compelling investment over the likes of other so-called yield stocks today.

Foolish takeaway

Admittedly, Wesfarmers’ share price is subject to its own risks.

A slowdown in mining, or worse-than-expected retail disruption from Amazon could wreak havoc on each of Wesfarmers’ business units and send its dividend the way of Telstra’s. However, given Wesfarmers’ existing industry position as a leader in many of its business categories (like Bunnings, Kmart and Officeworks), and the recent strong results from its non-retail division, I remain optimistic on management’s ability to navigate challenging environments and, at the very least, maintain its dividend yield.

As such, investors looking for safe and secure income should consider looking at Wesfarmers as their next investment!

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Motley Fool contributor Rachit Dudhwala owns shares of Telstra Limited. The Motley Fool Australia owns shares of Telstra Limited and Wesfarmers Limited. 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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