Is Wesfarmers Ltd now a buy for ethical investors?

News last month that Wesfarmers Ltd (ASX:  WES) plans to demerge Coles (although retaining a 20% stake) and sell its coal interests to reposition the company’s portfolio may result in increased investments by some ethical funds, which have previously avoided the company.

The restructure is to reposition the company towards higher growth opportunities such as Bunnings Australia and New Zealand as this should improve returns on capital for shareholders. But, ethical investors concerned by Environmental, Social and Governance (ESG) criteria may also find the new Wesfarmers meets their investment objectives with the partial removal of most of the company’s exposure to gaming and other “unethical” practices, as well as the sale of coal assets.

Ethical investment supports companies that have a sustainable and ethical impact, and ethical funds use ESG criteria to screen their investments. Some ethical funds do hold Wesfarmers due to the small impact on profit of the “unethical” businesses, but ethical investors that follow ESG criteria closely are unlikely to have invested in the company previously. 

With the expectations of increased interest from ethical funds it may present an opportunity to buy Wesfarmers now. Wesfarmers is down 7.8% for the year closing at $41.12 yesterday.

Wesfarmers has a trailing dividend yield of 5.31% before franking, and grossed up 7.5% pa dividend yield. It has a forward PE ratio of 16.92 based on JB Were’s forecast of earnings per share of $2.436.

Woolworths Group Ltd (ASX:  WOW), which is in the same sector as Wesfarmers, is trading on a foreward PE ratio of 20.1 (JB Were forecast earnings per share of $1.27) with a dividend yield of 3.45% before franking and grossed up 4.92% yield.

Woolworths is up 1% for the year helped by a profit of $1.5 billion in 2017 after recording a loss of $1.2 billion in 2016 following the closure of Masters. Woolworths closed at $26.64 yesterday. 

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Motley Fool contributor Rosemary Steinfort owns shares of Wesfarmers Limited. The Motley Fool Australia owns shares of and has recommended 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 Scott Phillips.

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