On paper, Wesfarmers Ltd (ASX: WES) shares look like one of the most diversified companies on the ASX.
Wesfarmers is about as close to ASX royalty as you can get. This company was founded way back in 1914 and today owns some of the country's most well-known and beloved retail outfits.
Yes, Wesfarmers is the name behind Bunnings, Kmart, OfficeWorks and Target. But it gets a whole lot deeper than that.
In addition to these names, Wesfarmers also owns Beaumont Tiles, TKD, Covalent Lithium, Kleenheat Gas, Australian Vinyls, Workwear Group, catch.com.au, Wesfarmers Chemicals, Energy And Fertilisers, and its most recent acquisition, the Priceline pharmacy chain.
On top of that, this company also retains stakes in a few other ASX-listed businesses, including Coles Group Ltd (ASX: COL) and BWP Trust (ASX: BWP).
There's more, but we'll leave these lists at that.
So it goes without saying that Wesfarmers is without a doubt one of the most diversified blue-chip shares on the ASX 200 Index, right? And a buy for portfolio diversification?
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Are Wesfarmers shares a buy for ASX diversification?
Well… it's complicated.
Yes, Wesfarmers does have many fingers in many pies. But not all of these pies are the same size.
To illustrate, let's look at a recent interview that Blake Henricks of Firetrail Investment did with Livewire.
Henricks named Wesfarmers as a sell, partly due to diversification concerns. Here's some of what he said:
It's a sell. Everyone loves Wesfarmers, and everyone knows about it, but two-thirds of the value sits within Bunnings. Now, Bunnings has done a great job through this huge boom…
What I'm concerned about is that if I'm looking for a defensive stock, I don't invest in a housing-related one and I don't invest in one with Kmart, Target and Lithium as well. So 20 times PE, it's not too bad, but I think there's downside risk to earnings and therefore as a defensive, it's a sell.
Knowing that two-thirds of a Wesfarmers share represents a share in Bunnings alone, Wesfarmers doesn't seem like the diversification play that one might initially assume. But that doesn't mean all expert investors reckon it's worth selling.
The upside…
As my Fool colleague James covered last week, ASX broker Morgans remains upbeat on Wesfarmers shares. This broker has an add rating on the company right now, with a 12-month share price target of $55.60.
Morgans cites Wesfarmers' "quality retail portfolio" and "highly regarded management team" as reasons for its optimism. It also reckons Wesfarmers will be able to grow its dividends across FY2023 and into FY2024 as well.
So only time will tell which ASX expert is right on their Wesfarmers call. But we can conclude that Wesfarmers shares aren't the silver bullet of portfolio diversification that their range of interests suggests.
