The Wesfarmers Ltd (ASX:WES) share price is up 15.8% since the start of 2024. Let’s take a look at why investors might be interested in WES shares.
WES share price in focus
Founded in 1914, Wesfarmers is an Australian conglomerate headquartered in Perth. Its main operations span Australia and New Zealand and include retail, chemical, fertiliser, industrial and safety brands and products.
Wesfarmers is a bit like a publicly listed private equity company. It has a long history of buying businesses, benefitting from their cash flow, re-investing in them and then selling them for a more attractive price. A good example of this might be Coles Group, which it bought in 2007 and spun out in 2018. However, by far (over 50%) of the company’s operating profit comes from Bunnings, the #1 hardware and home improvement business in Australia. Wesfarmers originally invested in Bunnings in 1987, buying the final 52% in 1994 for $594 million.
Wesfarmers has long been considered a leading blue chip stock on the ASX and is known for paying a consistent dividend. Other household names owned by Wesfarmers include Blackwoods, Kmart, Target, Officeworks, and Priceline Pharmacy.
The case for Consumer staples
The S&P/ASX200 Consumer Staples Index (ASX: XSJ) has delivered -1.14% per year of capital growth over the last 5 years. That compares to the average of all ASX sectors of 3.54% over the same period. Let’s take a look at why you might want a consumer staples company like WES in your portfolio.
Big dividends
While these types of companies might not be known for high growth, what they are known for is being solid dividend payers. Over the last 5 years the WES dividend yield has averaged 3.36% per year.
The reason that they’re able to pay consistent dividends relates to reason number 2 that investors love consumer staples companies…
Recession-proof
Ok, they may not actually be ‘recession proof’ but consumer staples companies definitely have an advantage over other sectors during downturns. By definition the products that they sell are staples, like food, beverages, and household products.
When a recession hits and consumers look to cut their spending, it’s always the discretionary spending that’s the first to go. Staples are a little more resilient, and so you’d expect a consumer staples company like WES would hold up a bit better than others when things get tough.
Less volatility
The third advantage that consumer staples companies have is their low(ish) volatility. Because, like we said, their products are always in demand, these businesses don’t tend to be cyclical.
A commodity or resource company can be the victim of fluctuating market prices and seasonal downturns, but companies like Woolworths or Coles tend to have a bit more pricing power because of their market share and the consistent demand. So, growth may be lower than other sectors, but so is the volatility.
WES share price valuation
One way to have a ‘fast read’ of where the WES share price is would be to study something like dividend yield through time. Remember, the dividend yield is effectively the ‘cash flow’ to a shareholder, but it can fluctuate year-to-year or between payments. Currently, Wesfarmers Ltd shares have a dividend yield of around 2.97%, compared to its 5-year average of 3.36%. Put simply, WES shares are trading below their historical average dividend yield.
Be careful how you interpret this information though – it could mean that dividends have fallen, or that the share price is increasing. In the case of WES, last year’s dividend was greater than the 3-year average, so the dividend has been growing.
The Rask websites offer free online investing courses, created by analysts explaining things like Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). They even include free valuation spreadsheets! Both of these models would be a better way to value the WES share price.
