The S&P/ASX 200 Index (ASX: XJO) share Wesfarmers Ltd (ASX: WES) is a top-quality business in my opinion, which is why I'm watching it closely.
There are few businesses on the ASX that are as old as Wesfarmers. It has a number of businesses within its portfolio, including Bunnings, Kmart, Priceline, Officeworks, Target, Catch, a chemicals, energy and fertiliser division (WesCEF) and industrial businesses.
There are a number of reasons why I think Wesfarmers is one of the best ASX 200 shares around, and why I'd like to talk about it.
At the current Wesfarmers share price, these are some of the reasons why I like it so much.
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Diversification
Wesfarmers is known for having a number of retail businesses such as Bunnings, Kmart and Catch.
But, I like that the business has been working on diversifying itself.
It wasn't too long ago that Wesfarmers acquired Australian Pharmaceutical Industries (API), the owner of Priceline and a couple of other businesses. I think that healthcare could provide defensive earnings for Wesfarmers, enabling it to hold up well.
Wesfarmers has also been seeing a strong performance in its WesCEF business. In FY22, WesCEF generated earnings before tax (EBT) of $540 million (up 40.6%), which was more than $418 million from Kmart Group and more than $181 million from Officeworks.
I like that the ASX 200 share is looking to diversify its portfolio further, such as the lithium projection at Mt Holland which is progressing.
Quality earnings
I think that Wesfarmers shares have high-quality earnings.
Bunnings is the leader in the hardware sector. Kmart is a leading major retailer. Officeworks seems to be the category leader for office products. And so on.
Being the biggest in a sector gives the scale advantages of buying power and other profit margin benefits. This enables Wesfarmers to sell products either at a cheaper price than competitors or sell at the same price and earn more profit.
The biggest contributor to Wesfarmers' profit is usually Bunnings. Not only does it make the most profit, but it's very effective at making the profit. For example, in FY22 Bunnings generated $2.2 billion of EBT. Its return on capital was 77.2%, which was enormous. It was even higher in FY21 at 82.4%.
Wesfarmers makes very good returns on the money that it has allocated to its businesses. If the ASX 200 share keeps re-investing then I think it gives it a very good chance of producing good profit growth.
Expected resilient performance
One of the main reasons why I think the Wesfarmers share price is looking more attractive is because it has dropped 25% since its peak in August 2021.
But, I don't think its profit is going to drop by 25%.
Wesfarmers points out that names like Kmart and Bunnings are seen as leaders in low-cost retail. They could perform well relative to competitors during 2023 and beyond.
I think it's possible that WesCEF could produce another good result in FY23.
At the moment, the forecast on Commsec suggests that Wesfarmers' earnings per share (EPS) could rise from $2.08 to $2.22 in FY23 and then $2.27 in FY24. In other words, it's expected not to even see a decline in profit.
Strong dividend
Whatever happens over the next year or two, the ASX 200 share could keep growing its dividend.
Commsec numbers suggest that Wesfarmers could pay an annual dividend per share of $1.83 in FY23 and $1.93 in FY24. The cash returns could be solid, even if the share price moves up and down.
In FY23, the grossed-up dividend yield could be 5.3%.
I think that the combination of potential long-term profit growth and dividends could mean Wesfarmers is a solid long-term contender.
