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Wesfarmers sold Coles shares. Should ASX investors take the hint?

Earlier this week, Wesfarmers Ltd (ASX: WES) announced to the market that it had successfully unloaded a large stake in Coles Group Ltd (ASX: COL).

Following its spin-off of Coles in late 2018, Wesfarmers had initially kept a 15% stake in the supermarket giant, but reduced this stake to 10.1% back in February. It has now reduced its stake further in Coles to just 4.9%. This sale is worth approximately $1.06 billion to Wesfarmers.

So now Wesfarmers is jumping ship from Coles, is this a ‘canary in the coalmine’ signal for investors to do the same?

Why Wesfarmers is bailing out of Coles shares

I think it’s worth noting that Wesfarmers might have a secondary agenda to just selling Coles shares due to a perceived lack of potential returns.

I think there are 2 additional factors in play.

Firstly, Wesfarmers (like most ASX companies) is going to be a little strapped for cash in the coming months. Its subsidiaries like Bunnings, Officeworks, Target and Kmart are all strong businesses, but ones likely to take big hits to sales and revenue during this coronavirus shutdown all the same.

Secondly, Wesfarmers is a conglomerate that sees value in diversification of its earnings base. We saw this in action when Wesfarmers acquired lithium-producer Kidman Resources last year. Right now, there are plenty of good quality businesses that are in the ‘fire sale’ pricing zone right now. Wesfarmers is likely to be looking to add to its vast portfolio and sees its capital in Coles as useful dry powder to use at this time.

Unlike most ASX companies, Coles is a stock that has held up remarkably well in this ASX bear market, thanks to its ‘consumer staples’ nature. Wesfarmers advised that its sale price for its Coles shares was around $15.39 – still well above its initial IPO price of around $12.80 in 2018.

In my opinion, Wesfarmers is taking advantage of this rare opportunity to make hay while the sun isn’t shining. It’s probably that the company sees better use for this $1.06 billion of capital elsewhere than leaving it in Coles in this current market.

Should you sell Coles shares too?

I don’t think that the reasons Wesfarmers are selling Coles translate into a universal reason for investors to dump the stock today. Coles remains a good, strong company with a rock-solid dividend. If you see other opportunities in the markets today that better serve your goals, you might be well-served following Wesfarmers’ example. But alternatively, if you bought Coles as a defensive, dividend-paying investment, I don’t see any pressing need to follow Wesfarmers to the market.

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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 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.