Wesfarmers Ltd (ASX: WES) is often cited as a typical ASX investor’s favourite blue-chip share. More diversified than the big four ASX banks, less volatile than our miners like BHP Group Ltd (ASX: BHP) and paying a healthy, fully franked dividend – there’s certainly a lot to like about this conglomerate.
Like many ‘defensive’ blue-chips, the Wesfarmers share price has been steadily rising over the past 12 months, partly due to lower interest rates. Investors are seeking rock-solid dividends to replace lower yielding ‘safe’ investments like cash term deposits and bonds – and Wesfarmers is certainly feeling the love.
Wesfarmers shares have climbed 36% over the last 12 months and sit at $43.92 at the time of writing. Anyone who has held Wesfarmers shares for over 14 months would also be benefitting from the rising Coles Group Ltd (ASX: COL) share price.
Coles was spun out of Wesfarmers in November 2018, with each Wesfarmers shareholder at the time receiving Coles shares as part of the de-merger. Coles shares debuted at around $12.80 when they hit the markets, but at the time of writing, Coles shares are going for $15.92 – representing a significant gain in their own right.
How defensive is Wesfarmers?
Stocks like Woolworths Group Ltd (ASX: WOW), Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD) as well as Coles (to a lesser extent) have been bid to the sky over the past year as investors chase ‘safe’ dividends.
These companies are all thought of as ‘defensive’ – meaning their earnings (and dividends) are thought of as ‘recession-proof’ to varying extents. Many investors are wary of being in the late stages of this economic cycle and are attracted to these kinds of shares, hoping that they will be able to maintain their level of shareholder payments if and when the good times end.
Wesfarmers does fit this bill to some extent. Its largest sources of earnings in FY19 hail from its Bunnings Warehouse store network ($1.6 billion), as well as its Kmart and Target Group retail stores $550 million) and Industrials ($524 million).
Bunnings is a difficult beast to characterise. In one sense, hardware goods and services are discretionary – meaning people will buy more when times are good and less when times are bad. In another, there is an element of stability too – if your kitchen sink breaks, you’re going to get it fixed, regardless of economic conditions.
Kmart and Target are both budget stores, so might even see increased sales if tough economic times come our way. It’s a similar story with the 15% stake of Coles that Wesfarmers still holds.
Many industrials are cyclical, like fertiliser and coal. But Wesfarmers’ gas and gold businesses are more stable and might balance some of this cyclicality.
All in all, I would still regard Wesfarmers as a defensive dividend-payer – despite some of its businesses displaying cyclical characteristics. Having such a diverse stream of income is what gives Wesfarmers much of its strength, and is a major reason why I would want to hold Wesfarmers shares if our economy takes a southern turn.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia owns shares of 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.