Could Wesfarmers Ltd (ASX: WES) be a quality ASX blue chip share to own with its strong operating businesses?
Image source: Getty Images
Why is Wesfarmers so good?
One of the things you want to see from a blue chip is that it can survive and thrive through various local and global problems.
Wesfarmers has origins going back to 1914, which shows that it has been able to keep going through many recessions, wars, COVID-19 and so on.
It has arguably some of the best retail businesses in their respective categories.
Bunnings is the biggest and leading home hardware retailer. Officeworks is the leading office supplies retailer. Kmart is the leading discount retailer. Catch is rapidly expanding as an online retailer.
Wesfarmers also has a number of industrial businesses relating to chemicals, energy, fertilisers and safety.
Unlike many other ASX shares that are stuck being a telco, bank or supermarket, Wesfarmers has the ability to invest in other businesses that are in different sectors.
For example, the ASX blue chip share invested in a lithium mining project which will diversify earnings as it comes online.
Strong performance
Speaking of online, Wesfarmers is one of the ASX retail shares that is seeing high levels of e-commerce sales growth right now.
In the first six months of FY21, total online sales across the group more than doubled, excluding Catch. Including the Catch marketplace, online sales of $2 billion were recorded for the half.
Kmart growth is accelerating again and the Target underperformance is being addressed. On a combined basis, Kmart and Target delivered a record earnings result for the period. Target's profitability has improved significantly, supported by strong demand and the ongoing 'simplification' of the businesses.
The ASX blue chip share's management are pleased with the decision to convert some Target stores in Kmart ones. There has been sales and transaction volume uplifts from those stores already converted.
Sometimes it can take a brave short-term decision to help long-term performance be stronger long-term.
The overall business continues to generate high levels of profit and cashflow. This can fund healthy dividends and even more acquisitions over time.
Half-year continuing operations net profit after tax (NPAT) and earnings per share (EPS) were both up 25.5%, to $1.4 billion and $1.25 per share respectively. The operating cashflow went up 4% to $2.2 billion.
Wesfarmers paid an interim dividend of $0.88 per share, representing a healthy dividend payout ratio of 70.4%.
The start of the COVID-19 pandemic saw high levels of demand for Bunnings and Officeworks products so that people could work, learn and do DIY projects at home. Bunnings continues to generate impressive growth with underlying earnings growth of 39% in the first six months of FY21.
What about the rest of FY21?
Wesfarmers said the outlook is more positive for Australia, and management believe that its businesses remain well placed to deliver satisfactory shareholder returns over the long-term.
Sales have continued to remain "strong" through January and February. However, growth is expected to show a slowing effect from March as businesses cycle against strong sale months in 2020.
Wesfarmers says that it will maintain an appropriately strong balance sheet to preserve flexibility to invest in long-term growth initiatives across the group and manage the ongoing uncertainty of COVID-19.
According to Commsec, the Wesfarmers share price is valued at 26x FY21's estimated earnings with a forecast grossed-up dividend yield of 4.6%.
