Wesfarmers Ltd (ASX: WES) stock and JB Hi-Fi Ltd (ASX: JBH) stock are appealing investments as ASX blue-chip shares. They are what I'd call category leaders.
In my eyes, JB Hi-Fi (including The Good Guys) is the leading electronics retailer in Australia. Wesfarmers owns Bunnings, Kmart and Officeworks, which I think are the leading retailers in their respective areas in Australia.
I'd be happy if I were already a long-term shareholder of either business after the share price rallies in the last few months.
Dividend yield
Aussie investors get the benefit of franking credits, which really supercharges the dividend income that we receive.
I think both Wesfarmers stock and JB Hi-Fi stock are good choices for dividends. They have a history of regularly growing the dividend, though that's not certain every year.
For FY24 and FY25, Wesfarmers is expected to pay a grossed-up dividend yield of 4.2% and 4.6% respectively, according to Commsec.
Looking at JB Hi-Fi, it's predicted to pay grossed-up dividend yields of 6% in FY24 and 6.1% in FY25.
On the passive income side of things, JB Hi-Fi wins on the size of the yield.
Valuation
I think a key reason why the dividend yield is noticeably lower at Wesfarmers is because its price/earnings (P/E) ratio is quite a bit higher.
They are different businesses, so I wouldn't expect them to trade on the same P/E ratio, but I think it can be informative to know how much you're paying for how much profit they're making and expected to make.
JB Hi-Fi's profit is expected to materially drop in FY24 amid the weak retailing conditions caused by higher interest rates and inflation. Even so, the projected earnings per share (EPS) of $3.84 for FY24 would put it on a forward P/E ratio of under 16, according to the Commsec numbers. EPS could then rise slightly in FY25 and FY26.
Wesfarmers, on the other hand, is expecting to see its EPS rise slightly in FY24 and FY25. A potential EPS of $2.23 puts the Wesfarmers stock price at around 30 times FY24's estimated earnings.
Business diversification
JB Hi-Fi has three different businesses – JB Hi-Fi Australia, JB Hi-Fi New Zealand and The Good Guys.
Wesfarmers has many more businesses – Bunnings, Kmart, Officeworks, Priceline (and other healthcare businesses), Catch, Target, the Wesfarmers chemicals, energy and fertiliser (WesCEF) division, and the industrial and safety businesses.
The Wesfarmers business is much more diversified across a variety of sectors. Management also has the flexibility to invest in new businesses via acquisitions. Some of its latest buys were in the healthcare sector, including InstantScripts and Silk Laser Australia.
Foolish takeaway
Wesfarmers stock is more attractive to me for the long term because of its ability to grow and change the business portfolio over time. Its diversification can help over the long term, particularly if the retail environment changes as a greater proportion of shopping is done online.
