Should I buy Westpac or Wesfarmers stock?

Which of these blue chip shares is a better buy?

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Both Westpac Banking Corp (ASX: WBC) and Wesfarmers Ltd (ASX: WES) stock are leading ASX blue chips. In this article, I'll discuss which one I prefer.

They may have somewhat similar names, but Westpac and Wesfarmers have different operations.

Westpac is a leading bank in Australia and New Zealand, with one of the largest lending portfolios.

Wesfarmers owns a number of retail, industrial and healthcare businesses including Bunnings, Kmart, Kmart, Target, Catch, Officeworks, Priceline, Silk Laser Australia, Instantscripts, Blackwoods and Wesfarmers chemical, energy and fertilisers (WesCEF).

I'm going to look at three different areas to help me decide.

Current operating environment

The Australian economy is tussling with high inflation and high interest rates at the moment. This is hurting the hip pocket of many Aussies, reducing discretionary spending at some ASX retail shares.

For Westpac, the bank's loan book is still performing well in terms of arrears and bad debts. Thankfully, most people are still paying for their mortgage payments.

The trickier thing for Westpac to navigate right now is the level of competition in the banking sector. Financial institutions don't need a large national branch network to challenge the major ASX bank shares. Just look at the success that rivals Macquarie Group Ltd (ASX: MQG) and ING have had at creating sizeable positions in the market.

Brokers and the internet have made it very easy for potential borrowers to compare lenders and loans, which encourages banks to offer bigger loan discounts. Combined with competition for customer deposits, bank net interest margins (NIM) are being challenged, hurting profitability.

Turning to Wesfarmers stock, some customers currently have less money to spend on retail. However, its major brands — Bunnings and (particularly) Kmart — are winning over households with their value credentials. To me, the sales growth they have been achieving suggests that Kmart and Bunnings are gaining market share.

Conditions have normalised after a strong period for WesCEF, though I think this segment still has a promising future, particularly if lithium prices recover – Wesfarmers is involved in a project under construction called Mt Holland.

Dividend payouts

There are two different ways I'll look at the dividend – the yield and stability.

According to Commsec, in FY24, the grossed-up dividend yield for Westpac stock is predicted to be 8%, while Wesfarmers is expected to come in at 4.3%. Clearly, Westpac is likely to have a larger upfront yield.

However, Wesfarmers' ongoing growth is expected to help upsize its passive income payouts, with the dividend projected to grow by 20.8% to FY26. This would mean that Wesfarmers' stock has a gross dividend yield of 5.2%. I'd expect more long-term growth in the subsequent years.

Meanwhile, the Westpac grossed-up dividend yield may only grow to 8.1% in FY26.

Growth prospects

We don't know precisely what's going to happen in the banking sector, but I don't think the competition is going to vanish. I suspect the NIM may remain challenged, particularly if Westpac tries to increase its market share – offering cheaper loans is one way to do it, but that comes at a cost to profitability.

For Westpac, population growth and rising property prices are useful tailwinds. Higher house prices should mean lower bad debts if a borrower needs to sell a property, and it also means bigger loans are needed to buy properties.

With Wesfarmers stock, population growth is a tailwind because there are more potential customers for its retailers. Additionally, the required construction of houses could help Bunnings.

I like Wesfarmers' diversification efforts to grow earnings by expanding in healthcare through acquisitions. Its lithium mining division could also offer a useful string to its bow.

Foolish takeaway

The share prices of both businesses have risen in recent months. Because of its earnings growth, I think Wesfarmers stock has stronger long-term growth prospects, so I'd choose that blue chip.

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 Macquarie Group and Wesfarmers. The Motley Fool Australia has positions in and has recommended Macquarie Group and 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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