Wesfarmers Ltd (ASX: WES) shares have been a standout performer on the ASX this year, surging 13% since January. They have surged 33.5% in the past 12 months and currently trade at $64.80 apiece at the time of writing.
Investors pushed Wesfarmers shares to five-year highs of $70 in May. This was a continuation of a longer-term uptrend that had been in situ since June 2022, where they lifted from lows of around $41 apiece.
The trend has shown some short-term relief, with shares down nearly 7.5% since then. Here are three compelling reasons to consider adding Wesfarmers shares to your portfolio in my best estimation.
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Wesfarmers shares: Diversification in one stock
In my view, a major driver of Wesfarmers' business growth is its highly diversified operations. When you invest in Wesfarmers shares, you're gaining exposure to a portfolio of some of Australia's strongest retail, healthcare, and chemicals brands.
These include Bunnings, Kmart/Target, Officeworks, Priceline Pharmacy, and Flybuys, among others. Not only are these low-cost offerings in many instances, but brands such as Flybuys have consumer advantages.
Diversification in Wesfarmers' portfolio doesn't just spread risk; it also opens multiple avenues for value creation.
The company operates a total of 37 portfolio brands, ensuring its tentacles are wrapped firmly around the Australian retail sector.
According to Goldman Sachs, many of Wesfarmers' divisions remain "under-appreciated by the market," including digital, retail media, and the WES health platform.
In a May note, Goldman also projects 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, the broker says. In my opinion, these cash flows could fund more high-growth and high-return platforms, which the company is currently exploring in domains such as health and lithium.
Strong performance from Bunnings and Kmart
Wesfarmers' portfolio is filled with companies reporting low profit margins but boasting tremendously high sales volumes. The high volumes ultimately lead to wide consumer penetration. This is a positive for the outlook of Wesfarmers shares in my view.
Bunnings and Kmart are prime examples. Combined, these two companies made up around 66% of the Group's H1 FY 2024 revenues and around 80% of its EBIT.
Both companies booked rather thin pre-tax margins in H1 FY 2024—12.9% for Bunnings and 10% for Kmart—but their sales volumes were enormous, with $9.9 billion and $5.9 billion respectively.
As a result, both companies produced excellent returns on capital, with Bunnings delivering 66% and Kmart a 59% return on all the money injected into their franchises. Return on capital measures how efficiently a company produces earnings on its investments.
For instance a 66% return on capital means that Bunnings produces 66 cents for every $1 of funds that has been invested into the business. How many fund managers can boast that kind of return?
In my view, these figures underscore Wesfarmers' competitive advantage against other players in the Australian retail market.
Increasing dividends
Aside from capital appreciation, Wesfarmers' dividend policy could add another attractive layer for investors.
The trailing dividend is a fully franked dividend of $1.94 per share, meaning the yield stands at around 2.9% at the time of writing.
The recent increase in dividends is particularly noteworthy, in my estimation. Despite flat half-year sales growth of 0.5%, Wesfarmers grew its net profit after tax (NPAT) by 3%, resulting in a dividend increase of 3.4% to 91 cents per share.
Goldman Sachs anticipates this trend will continue through FY2025/FY2026, driven by cost optimisation and digitalisation initiatives that could expand Wesfarmers' margins.
It's worth noting UBS projects dividends of $2.16 per share in FY 2024 from Wesfarmers.
This could place Wesfarmers on the mantlepiece for investors seeking reliable income alongside potential growth.
Wesfarmers shares – a good long-term investment?
Wesfarmers shares have proven themselves as a long-term investment in the last year, consistently outperforming the S&P/ASX 200 Index (ASX: XJO), which is up 2% in the past year.
The company's diversified portfolio, strong performance from key divisions like Bunnings and Kmart, and increasing dividends could make it a compelling choice for investors.
Always remember three things however: past performance is no guarantee of future results; always remember to conduct your own due diligence; and consider your own personal financial circumstances.
