The Wesfarmers Ltd (ASX: WES) share price has outperformed in 2020, but what are its prospects in the short to medium term?
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What does Wesfarmers do?
Wesfarmers is a Perth-based conglomerate with a diversified portfolio of operations.
The company has interests in retail including home improvement, general merchandise and office supplies. Its well known retail brands include Bunnings, Officeworks, Target and Kmart. Wesfarmers also has an industrials segment with exposure to chemicals, energy, fertilisers and safety products.
The Wesfarmers share price is up 11.5% in 2020 to be strongly outperforming the S&P/ASX 200 Index (ASX: XJO).
The conglomerate has a market capitalisation of $52.4 billion with a 3.3% dividend yield right now.
What is there to like about the Wesfarmers share price?
Despite the challenges arising from the coronavirus pandemic, the Wesfarmers share price is rocketing higher.
That's good news for shareholders and I think the company's diversification has been a strong factor.
While some business segments have struggled, demand for home improvement products has surged during the recent lockdown periods.
That means while some units may underperform, the balanced exposure across the broader portfolio has been good for earnings.
I also like that Wesfarmers is currently sitting on a large pile of cash. That has been accumulated from recent sales including another of its stakes in Coles Group Ltd (ASX: COL) for $1.1 billion.
Normally, I'd be concerned about the cash drag on portfolio performance. However, in the current times, that cash could be a very useful tool.
It means the company's balance sheet is intact and provides operational flexibility. It could also mean Wesfarmers pays a special dividend or looks to snap up undervalued companies for its portfolio.
What are the potential downsides?
One concern I have about the Wesfarmers share price is the conglomerate discount. This is a phenomenon where conglomerates trade lower than specialised businesses as investors dislike the diversification within the business.
For instance, I could choose to diversify my own portfolio without the company doing it for me.
The ongoing COVID-19 restrictions, particularly in Victoria, are also of concern for certain business arms like retail.
Looking ahead, another challenge is finding ways to continue growing and innovating to deliver more shareholder value.
Is the Wesfarmers share price a good buy?
The Wesfarmers share price has been a strong performer in 2020. I think the strong cash balance and low-interest rates could see a buying spree from the conglomerate next year.
It could be a touch overvalued right now given the current market, but I wouldn't write off Wesfarmers as a good dividend share just yet.
