Better ASX 200 retail stock to buy now: JB Hi-Fi or Wesfarmers shares?

Which retailers can cope with Australians willing to spend less after 12 interest rate hikes?

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There is much consternation at the moment about ASX shares in the retail industry.

It's perfectly understandable that stock prices for consumer discretionary businesses have plunged. Australians are dealing with 12 interest rate rises in just over a year, and don't have much spare cash to spend.

But does this mean ASX retail shares now have upside as the rate hikes come to a halt?

Let's take a look at two of the most prominent players in this space: Wesfarmers Ltd (ASX: WES) and JB Hi-Fi Limited (ASX: JBH).

'The least discretionary discretionary'

Wilsons equity strategist Rob Crookston last week called Wesfarmers "the least discretionary discretionary".

"Wesfarmers has a well-established and trusted brand portfolio, including popular retail chains such as Bunnings Warehouse, Kmart, and Officeworks," he said.

"These brands have a strong customer base and tend to perform well regardless of the economic climate."

IML portfolio manager Michael O'Neill especially loves the hardware chain Bunnings.

"Bunnings is a very high-quality franchise which continues to go from strength to strength, generating strong, and increasing, cash flow," he said.

"It is dominant in its industry and has become a part of popular culture and embedded in its communities with its DIY mentality, motivated staff and beloved sausage sizzles."

Both experts are thus keen on the growth potential and income production of Wesfarmers shares.

The stock's dividend yield currently stands at a fully franked 3.80% after the share price tumbled 6% since 26 April.

The income king that 'just paid out the largest interim dividend in its history'

JB Hi-Fi shares have also plunged in recent times, with its share price down 6.8% since 19 May.

But the amazing surprise is that it's paying out a whopping 8.09% dividend yield, which is fully franked, no less.

The Motley Fool's Sebastian Bowen is a fan, saying earlier this month that the market is "being too hard" on the electronics retailer.

"The company's recent financial results show it is a resilient business," he said.

"Just last month, this electronics retailer told investors that Australian sales were up by almost 39% against its pre-COVID levels. And in FY2022, the company posted a record after-tax profit of $545 million, which was up 7.7% over FY21's numbers."

He noted that JB HiFi's price-to-earnings ratio is hovering just above 8.

"JB has just paid out the largest interim dividend in its history," said Bowen.

"Back in March, investors were treated to a payment of $1.97 per share, a big rise from last year's interim dividend of $1.63."

The verdict

Although JB Hi-Fi shares are extremely tempting in light of the company's huge dividend yield, I favour Wesfarmers as a long-term buy.

The products it sells through retail brands like Bunnings and Kmart feel like they are more essential everyday items that could better withstand an economic downturn. 

Cash-strapped Australians will delay the purchase of their next smartphone or big-screen television but will still need clothes for their kids and screws to maintain their house.

Wesfarmers, as a conglomerate, is also better diversified, with significant interests outside the retail industry, such as mining.

According to CMC Markets, four out of 13 analysts currently rate Wesfarmers as a buy. Three out of 14 analysts recommend JB Hi-Fi as a buy at the moment.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Jb Hi-Fi. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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