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HY21 report: Why I think Wesfarmers (ASX:WES) is one of the best ASX blue-chips

Wesfarmers Ltd (ASX: WES) reported its first-half results to the market this morning, finishing off a strong calendar 2020 for the business.

In midday trade, the Wesfarmers share price is unmoved, with shares edging 0.06% lower to $54.12.

Sales strengthen despite COVID-19 impacts

The conglomerate recorded group revenue of $17.8 billion, up 16.6%, underpinned by strong sales and earnings growth across Bunnings, Officeworks, Kmart, and Industrial & Safety despite sporadic lockdowns due to COVID-19.

Net profit from continuing operations rose 25.5% to $1.4 billion, demonstrating strong operating leverage despite incurring an extra $30 million in costs related to providing COVID-safe environments.

Return on equity across the group was 24.7%, up from 21.4% a year ago.

Divisional performance 

Bunnings, the largest contributor to group revenue and earnings, continued its strong momentum, recording a 24.4% increase in sales and a 35.8% increase in earnings before tax. This was led by investments in customer experience through the expansion of online product ranges and upgrades to in-store product displays. Management noted due to travel restrictions, customers are spending more time undertaking projects at home.

Officeworks revenue increased 23.7% to $1.5 billion for the half, while earnings before tax increased 22.0% to $100 million, spurred by investments in data analytics to personalise communication with customers and increased demand for home office products as Australians spent more time learning and working from home.

Kmart Group, which incorporates Kmart, Target, and Catch, grew revenue by 9% and increased earnings by 38.4%, led by strong online penetration and sales. Catch exemplified this tailwind, recording gross transaction value growth of 95.6%.

The Chemicals, Energy, and Fertilisers division experienced a 6.6% decrease in revenue and 7.5% drop in earnings, primarily due to additional supply from an ammonium nitrate competitor.

Industrial and Safety revenue increased 4.7%, with earnings up 68% to $37 million due to higher sales and cost improvement in Blackwoods.

The company maintains a strong balance sheet, reporting a net cash position of $871 million at the end of the half, with management stating it would be patient looking for new growth opportunities.

However, Wesfarmers did announce its commitment to capital expenditure of $950 million on a joint venture to develop the Mt Holland Lithium Hydroxide project. The first production is expected in the second half of the 2024 calendar year.

Pleasingly for income investors, management announced a fully franked interim dividend of $0.88 per share, an increase of 17% or $0.13 per share compared to last year. This puts Wesfarmers shares on a trailing dividend yield of 3.4%.

My take

The headline after opening the half-year report is “the primary objective of Wesfarmers is to provide a satisfactory return to shareholders”. It may seem straightforward, but I think this is what makes Wesfarmers an outstanding business.

Each division within the group is selected to earn a return on investment, and management has a track recording executing on this objective, illustrated by the 24.7% return on equity.

While COVID-19 has produced a tailwind to Bunnings and Officeworks, I don’t see the momentum relenting anytime soon. As a result, I would argue that Wesfarmers is one of the best blue-chip companies you can own on the Australian market.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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