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Wesfarmers Ltd (ASX:WES) shares drop lower on Coles demerger update

In morning trade the Wesfarmers Ltd (ASX: WES) share price has taken a tumble after providing an update on its Coles supermarkets demerger.

At the time of writing the conglomerate’s shares are down over 1% to $49.43.

When is the demerger going to happen?

According to today’s update, the demerger of Coles is expected to be completed in November 2018, subject to shareholder and other approvals.

Wesfarmers will retain 15% of the supermarket giant and 50% of its flybuys business. The latter is being done to support the continued development of the popular loyalty program and better leverage the combined Coles and Wesfarmers digital and data ecosystem to improve their respective customer offers.

Management has advised that Coles will be demerged with a robust balance sheet. Net debt will be approximately $2 billion, which it believes will support a strong Baa1/BBB+ credit rating with substantial headroom.

In respect to dividends, the Coles business will continue to follow Wesfarmers’ long-established approach. This will see a dividend payout ratio ranging from 80% to 90%.

Overall, management believes that the demerger represents a significant repositioning of the Wesfarmers’ portfolio which will set up both the conglomerate and the Coles business for success over the next decade.

Wesfarmers Managing Director Rob Scott stated that: “The demerger will reposition the Group’s portfolio to target a higher capital weighting towards businesses with strong future earnings growth prospects. Post-demerger, Wesfarmers will have a portfolio of cash generative businesses, with strong returns on capital, good momentum and leading positions in their respective markets.”

Should you invest?

While I think that the move to demerge the Coles business is a smart one, I do feel that its share price appreciation over the last three months means that its shares are fully valued now.

As such, I wouldn’t be a buyer of its shares unless there was a reasonably big pullback in their price. The same applies for rival Woolworths Group Ltd (ASX: WOW) which has also seen its share price storm higher over the last few months.

Instead of Wesfarmers and Woolies I would be buying one of these high-flying blue chips.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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