WES share price in focus
Founded in 1914, Wesfarmers is a diversified Australian conglomerate headquartered in Perth. Its operations span retail, chemical, fertiliser, industrial and safety brands and products across Australia and New Zealand.
Wesfarmers is often compared to a publicly listed private equity firm. It has a long history of buying businesses, leveraging their cash flow, re-investing in growth and eventually selling them for a premium. A notable example of this is 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 began buying parcels in Bunnings in 1987, eventually acquiring 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 well-known brands under the Wesfarmers umbrella include Blackwoods, Kmart, Target, Officeworks, and Priceline Pharmacy.
The appeal of ASX Consumer Discretionary shares
The S&P/ASX200 Consumer Discretionary Index (ASX: XDJ) has returned 7.81% per year over the last 5 years compared to 3.66% per year from the broader ASX 200. The consumer discretionary sector covers a broad range of goods and services, so it can be hard to compare companies in this group. However, here are a few things you might want to consider when investing in a consumer discretionary company like WES.
Timing
Consumer discretionary companies usually have their best performance when interest rates are low. Just think about it – when rates are low, you’re more likely to go out and buy those ‘toys’ or things that you may not really need, but you certainly want. That could be new tech, travel, or your new power tools – it all comes under this category.
Despite the current high interest rate environment, WES has still managed to grow revenue by 9.2% per year over the last three years.
Dividends
The dividends you’ll receive can vary with the current economic environment, but historically many of the big ASX consumer discretionary shares have been reliable dividend payers.
WES offers a current dividend yield of 2.6% and over the last 5 years has averaged 3.4%.
Familiarity
We’re often advised to invest in what we know. Consumer discretionary shares may be a good fit then, as these tend to be companies that we see on a daily basis and their business model is easy to understand. You probably have a better idea how Wesfarmers Ltd make their money than some niche tech company or a B2B industrials company.
This doesn’t necessarily mean performance will be any good, but they’re definitely easier to get your head around when you’re starting out investing.
WES share price valuation
One way to have a ‘quick 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 2.62%, 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.
