Why I plan to buy Wesfarmers shares for my ASX portfolio

This retail share could be the next one for my ASX share shopping basket.

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Wesfarmers Ltd (ASX: WES) shares might be the next new name that I buy for my ASX portfolio.

I already own a number of S&P/ASX 200 Index (ASX: XJO) shares, including Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Altium Limited (ASX: ALU), Fortescue Metals Group Ltd (ASX: FMG) and Rural Funds Group (ASX: RFF).

I've never owned Wesfarmers shares, even though the ASX 200 retail conglomerate is one of my preferred choices in ASX dividend shares.

Here's why I think the current economic conditions could make it a good time for me (and other investors) to look at the business.

Cyclical opportunity?

Some companies, such as Xero Limited (ASX: XRO), are typically able to deliver strong growth revenue every year.

But, I think investors can find buying opportunities in cyclical sectors such as mining and retail shares at the right time.

I wouldn't describe Wesfarmers' retail brands as the most cyclical ones out there. But, it's possible that names like Bunnings, Kmart, Target, Catch, Officeworks and Priceline may see variability in performance during weaker economic times.

The Wesfarmers share price is down around 20% from its height in August 2021. It's not as low as it was in 2022, but at the current price, it might be a strong long-term investment opportunity.

And if economic conditions improve, or if the Wesfarmers share price falls back, there could be an even more compelling opportunity.

Long-term wealth compounder

I believe there are some excellent businesses on the ASX, but not many have delivered a solid long-term performance as Wesfarmers has.

According to CMC Markets, over the past five years, the company has delivered an average annual rate of total shareholder returns (TSR — dividends plus capital growth) of 15.4%. For the past decade, the TSR figure is 11.2%.

Wesfarmers' core businesses have been very good at growing profit over time. I'm referring to Bunnings, Kmart and the Wesfarmers chemicals, energy and fertilisers (WesCEF) division.

Australian companies such as Wesfarmers have some useful tailwinds, like population growth. Wesfarmers can keep expanding its Bunnings and Kmart earnings with more stores, online sales and bolt-on acquisitions, such as Beaumont Tiles.

If I can invest in a business that can keep growing for many years ahead, I can benefit from compounding, less brokerage from fewer investment transactions, and a reduced number of capital gains tax events.

Diversification

I really like Wesfarmers shares for its flexibility in that it can invest in many different market sectors.

It's not stuck being a bank or a supermarket business. Management sees lithium as a long-term opportunity, so it invested in a lithium project called Mt Holland. Healthcare is an industry with long-term tailwinds thanks to technology developments and ageing demographics – Wesfarmers bought Priceline, acquired InstantScripts and is looking for other opportunities.

Wesfarmers also used to own coal mines and Coles Group Ltd (ASX: COL), but it no longer does after divestments.

With the company able to shift its portfolio focus over time, I feel more confident signing up for a long-term investment with Wesfarmers shares than with an industry-specific pick. It can future-proof itself.

Motley Fool contributor Tristan Harrison has positions in Altium, Brickworks, Fortescue Metals Group, Rural Funds Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, Brickworks, Washington H. Soul Pattinson and Company Limited, Wesfarmers, and Xero. The Motley Fool Australia has positions in and has recommended Brickworks, Coles Group, Rural Funds Group, Washington H. Soul Pattinson and Company Limited, Wesfarmers, and Xero. 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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