Why I like Wesfarmers Ltd (ASX:WES) at this share price 

Wesfarmers Ltd (ASX: WES) is a company with a long history of strong performance. 

This is an old school conglomerate – like Washington H. Soul Pattinson Ltd (ASX: SOL) – made up of many different businesses in various industries. I like the conglomerate business model because it reduces the reliance on a single business which may run into trouble. 

These days, its largest business holdings are Coles, Bunnings, Kmart and Target.  It also owns Officeworks and a variety of other industrial businesses. 

In a recent presentation, the company noted that a shareholder who invested upon listing in 1984, reinvested their dividends and participated in the other capital management initiatives, would have earned a return of 19% per annum.  

That’s compared to the market’s return over that time of 10.7% per annum. 

Quite impressive.  The question of course is, can it continue? 

What does the future hold? 

It’s unlikely Wesfarmers can achieve such large outperformance in the future.  

But with its current stable of businesses, I think it has a decent chance of providing above average returns. 

Bunnings is arguably one of the best businesses in Australia. Right now it’s hard to see Bunnings being disrupted by anyone in the near future. 

The UK & Ireland expansion is still losing money at this stage, so it’ll be interesting to see if it can turn this around. 

Its highest earner, Coles, is possibly being de-merged and listed on the market as a separate company.  

After the successful turnaround of Coles following the GFC, it seems Wesfarmers no longer sees the potential for outsized returns from Coles, going forward.  

Management has suggested they’re looking for a business with higher growth prospects and a higher return on capital. 

Kmart is going from strength to strength with consumers lapping up its low-cost offering. 

Target on the other hand is really struggling, and increasingly, there just doesn’t seem to be a place for this business in the Australian retail landscape. 

 Foolish Bottom Line 

Wesfarmers has enjoyed a good run with the success of Bunnings and turnaround of Coles. 

It is facing a few issues with Target and Bunnings’ overseas efforts.  This could see it throwing good money after bad. 

With the share price at a similar level to 5 years ago, I think Wesfarmers is worth considering.  Management have certainly proven they can deliver solid returns over the long term.  

This current price certainly looks like a good entry point for income investors, with shares on a gross dividend yield of 7.1%. 

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Motley Fool contibutor David Gow owns shares in Wesfarmers and Washington H. Soul Pattinson. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company 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 Scott Phillips.

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