The Wesfarmers Ltd (ASX: WES) share price looks like an appealing long-term buy in my opinion.
Why does the long-term part matter? I think all investing should be done with the long-term in mind, even if the investment gains play out sooner than expected.
I think good investing takes patience. Holding shares for a long time gives us a better chance for a good business to deliver good returns. It gives the business more time to deliver profit compound growth, which may help push the share price higher.
Plus, long-term investing means that investors can receive more dividends, which can be re-invested into more shares.
With the Wesfarmers share price down 25% from August 2021, I think it's a good time to invest for a few different reasons.
Attractive financials
With the company now priced at a materially lower level, we're getting the same business for a much better price.
Let's look at what the current price/earnings (P/E) ratio is. Commsec estimates currently suggest that Wesfarmers could generate $2.16 of earnings per share (EPS) in FY23. This puts the Wesfarmers share price at 23 times FY23's estimated earnings.
I think that's a very reasonable valuation considering the high-quality nature of the business.
The company achieved an overall return on equity (ROE) of 32.8% in the first half of FY23. That shows how much profit Wesfarmers generated from the shareholder money that is retained within the business.
Bunnings, the key profit generator of the business, saw a return on capital (ROC) of 70.7%.
These are the types of numbers that I'd want to see from my businesses. It also suggests that Wesfarmers can earn great returns on profit it re-invests within the business.
Growth platforms
I like that Wesfarmers is putting money into areas where it has a large growth opportunity with a long-term growth runway.
The hardware segment is huge, so Bunnings has plenty of growth avenues with commercial customers, tools and other areas. For example, it's expanding Tool Kit Depot into the east coast of Australia.
Wesfarmers' expansion into health and beauty with the acquisition of Priceline and Clear Skincare Clinics could turn into a very long-term play. The ASX share has identified spending trends and ageing demographics as two helpful tailwinds.
I think the Wesfarmers chemicals, energy and fertiliser (WesCEF) business is a very compelling segment. In the FY23 first half, WesCEF's earnings before tax (EBT) increased by 48.6% to $324 million. There is plenty of further growth potential here as it works on getting the Mt Holland lithium mine operational.
Having multiple growth avenues gives the business more compound growth potential, in my opinion.
Commitment to shareholder returns
Wesfarmers says that a key objective is to "provide a satisfactory return to shareholders".
I like this because I think it guides management's capital allocations, ensures they don't take any major risks with the business and look to provide growing cash returns in the form of dividends.
In FY23, Commsec numbers suggest that Wesfarmers is going to pay an annual dividend per share of $1.87. This could translate into a grossed-up dividend yield of 5.4%.
Over the past five years, the Wesfarmers share price has risen by 64%. Past performance is not a reliable indicator of future performance. But, I think it shows that the business is making steady long-term progress, and the market is recognising that.
