3 things about Wesfarmers stock every smart ASX investor knows

This is a great business and here's what you need to know about it.

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Wesfarmers Ltd (ASX: WES) stock is one of the most appealing blue-chip options in my opinion. There are a few key reasons why I like it so much.

The company owns a number of businesses including Bunnings, Kmart, Officeworks, Target, Priceline, Instantscripts, Silk Laser Australia and many more.

But, it's not just a collection of businesses that are delivering shareholder returns by luck. There are some great underlying factors.

Strong returns on investment

Wesfarmers has been operating for many decades. Every year it has to make a choice about what it wants to put its money toward within its businesses to try to maintain and grow its market position and improve its customer offering.

Making good choices has enabled Wesfarmers to build very impressive businesses.

Wesfarmers is able to tell us how much profit it's making on money invested in each business with the return on capital (ROC) metric and it says how much profit it makes on retained shareholder money with the return on equity (ROE) metric.

In the FY24 first-half result, it reported a ROC of 65.8% for Bunnings and 58.8% for Kmart Group. These are great numbers, they show strong performance and quality while also indicating how profitable additional investments could be in the future.

Wesfarmers, as a whole, reported a ROE of 31.4% for the HY24 result. That's a big underlying driver of Wesfarmers stock. If it can keep re-investing at that rate of return ,the future is very bright.

Ongoing diversification

Wesfarmers is making significant progress on diversifying its revenue away from Australian retailers.

Its (Kmart) Anko products are being sold in Canada, and it wants to expand in the US and Asia.

It's making acquisitions in the healthcare space, which is exposed to ageing tailwinds.

Wesfarmers is working on a lithium project called Mt Holland, which gives it exposure to the global decarbonisation efforts.

I like that Wesfarmers can invest in whatever sector it wants to where it sees an opportunity.

Impressive goals

Wesfarmers has a key goal of delivering "a satisfactory return to shareholders". It defines 'satisfactory' as being in the top quartile of total shareholder return (TSR) over the long-term. In other words, it wants to be within the top 25% performers of ASX shares.

It wants to grow the dividend for shareholders, assuming the profit, cash flow and balance sheet allows.

Wesfarmers stock is usually on target with those objectives, but it's not guaranteed of course.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. 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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