Wesfarmers Ltd (ASX: WES) shares could be driven higher by the S&P/ASX 200 Index (ASX: XJO) stock's plan for acquisitions to grow its business.
There are a number of businesses within the Wesfarmers portfolio including Bunnings, Kmart, Target, and Officeworks. In recent years, it has added multiple others including Catch, Beaumont Tiles, and Priceline.
Wesfarmers managing director Rob Scott outline the company's broad strategy in a presentation at the Macquarie Group Ltd (ASX: MQG) investment conference today.
He wasn't there to talk in detail about the performance or strategies of individual businesses, but about Wesfarmers' overall positioning in the market.
A focus on its strongest businesses
The Wesfarmers boss reminded investors the company's primary objective is to "provide a satisfactory return" to shareholders. That's defined as "top quartile total shareholder return (TSR) over the long-term". In other words, produce better returns than the returns generated by at least 75% of other businesses.
Scott said, in recent years, it has been allocating the majority of incremental investment towards businesses that deliver a higher return on capital. Those businesses are Bunnings, Kmart, and Wesfarmers chemicals, energy, and fertilisers (WesCEF).
The company has been investing in the WesCEF business through the development of the Mt Holland lithium project and it's also considering "a number of expansion options". This sounds promising for Wesfarmers shares in the future.
With Kmart, it's opening new stores, investing in new products, and the significant store conversion program that led to a reallocation of capital from Target to Kmart which, Scott says, "is already delivering stronger returns for shareholders".
Acquisition strategy
Scott said Wesfarmers only pursues opportunities where it can add value or provide capabilities to enhance the value of the acquisition.
The ASX 200 stock's boss said the business favours investments where it can "deploy incremental capital over time such that the business would be materially more valuable in five to ten years' time".
It noted two recent examples. One was the joint venture between WesCEF and mining company SQM that "provides access to the attractive critical minerals space".
The second was the Australian Pharmaceutical Industries (API) acquisition. This formed the foundational asset for the company's new health division and "provides exposure to structural growth in the health, wellbeing and beauty sectors".
Both of these acquisitions provide "valuable options for incremental investment", according to Scott. With Mt Holland, Wesfarmers is assessing the opportunity to expand the project's mine and concentrator, and it's also considering an expansion of the refinery.
For Wesfarmers Health, the company sees "potential for incremental bolt-on acquisitions to support growth".
Last month, the business made a proposal to buy Silk Laser Australia Ltd (ASX: SLA), the largest non-surgical aesthetics clinic operator in Australia and New Zealand. Scott said this will complement the Clear Skincare Clinics business it already owns.
Wesfarmers also noted its divisions consider "bolt-on acquisitions where they complement divisional growth strategies and add new capabilities". Catch, Beaumont Tiles, and Adelaide Tools were some of the examples provided.
Are these strategies working?
In the Macquarie presentation, Wesfarmers pointed out that its TSR [total shareholder return] has outperformed the All Ordinaries Accumulation Index (ASX: XAOA) over the last ten years and five years. The TSR is the return of the Wesfarmers share price combined with dividends.
Over the last ten years to April 2023, the Wesfarmers TSR has been an average of 10.8% per annum, compared to 8.1% for the index. However, past performance is not a guarantee of future performance.
But I'd guess management will be hoping that ongoing investment in its businesses (and new ones) will help that long-term outperformance continue.
