Is Wesfarmers stock a good long-term investment?

A diversified portfolio, market penetration and growing dividends are just three reasons to like this company.

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Through the Australian share market, we can buy passive interests in a diversified set of operations via a single investment.

With an investment in Wesfarmers Ltd (ASX: WES) stock, we have just that. The holding company boasts a portfolio containing some of Australia's strongest retail, healthcare, and chemicals brands.

These include Bunnings, Kmart/Target, Officeworks, Priceline Pharmacy, and Flybuys just to name a select few. When you own Wesfarmers stock, you own pieces of these companies, too.

Wesfarmers has a long history of creating value for its shareholders. Its share price is up 81% since May 2019. A $10,000 investment back then is now worth $18,100, plus $1,667 in dividends.

But what about the future? Here, I'll explain.

Diversification: Good for risk and value

One major reason for Wesfarmers' success is its highly diversified operations. Most people think of diversification as spreading their risk across a number of assets.

But diversification also provides many sources of value. Wesfarmers has 37 brands operating under its wings. It has fingers in many pies.

Goldman Sachs touched on this in a recent note, stating many Wesfarmers' divisions remained "under-appreciated by the market", including digital, retail media and the WES health platform.

Goldman also expects a respective 6% and 11% growth in sales and earnings before interest and tax (EBIT) for the Bunnings franchise in FY 2025/2026.

This could generate "strong annual free cash flow of $2.5 billion–$3 billion to fund two new high-growth and high-return platforms, Health and Lithium…".

These are two points to take note of.

Speaking of Bunnings and Kmart

Wesfarmers' portfolio is filled with low profit margin, high sales volume companies. They have wide consumer penetration, as a result.

Goldman cited volume and consumer penetration in its view on Wesfarmers stock. It said the company had the "largest volume of consumer data assets", which included "14.2 million total loyalty members across Flybuys, Priceline and PowerPass".

Both Bunnings and Kmart fit this mould, too. For instance, Bunnings made up 44% of the company's revenues in the six months to 31 December 2023 but comprised 58% of the group's EBIT. Kmart was 22% and 29%, respectively.

Bunnings' H1 FY 2024 EBIT margin was 12.9%, whereas Kmart's was 10%.  But sales volume was tremendously high — $9.9 billion and $5.9 billion respectively.

Both companies subsequently have stellar returns of capital (ROC), tallying 66% for Bunnings and 59% for Kmart. That means every $1 Wesfarmers invests into Bunnings and Kmart returns 66 and 59 cents on that dollar, respectively. This is a competitive advantage.

Dividends increasing

Aside from the capital appreciation, a final tailwind for Wesfarmers is the company's dividend. The fully franked payment of $1.94 per share gives an ungrossed dividend yield of around 2.84%, as I write.

However, it's the recent increase that's worth noting.

The company's half-year sales growth was flat at 0.5%. But it grew net profit after tax (NPAT) by 3%. That means each $1 of new revenues brought in $6 of additional profit for the half – quite the result.

The Wesfarmers board increased its dividend by 3.4% to $0.91 per share. Goldman Sachs sees this trend continuing through FY 2025/2026 as "cost optimising and digitalisation initiatives drive margin expansion".

Foolish takeaway

Wesfarmers stock has proven to be a superb long-term investment. Based on performance, I believe it can continue to beat the S&P/ASX 200 Index (ASX: XJO) over time.

Since January this year, the Wesfarmers share price has climbed more than 20% into the green.

Motley Fool contributor Zach Bristow 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 Goldman Sachs Group and 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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