ASX Code: Wes
Security price: $41.55
Forecast distribution: 2.06c per share fully franked
The recent market downturn has hit many stocks, including high-yielding favourites. But with the market now back at fair value I think this is a chance to re-examine at some of those income-producing stocks.
One stock that has been attractive to income-focused investors has been Wesfarmers. After hitting highs in February of $46.95, Wesfarmers shares have retreated back to about $41.55.
Given its solid dividend yield and strong track record, Wesfarmers is worth accumulating at around $40.
With bond yields and interest rates at record lows, high-yield stocks have obviously been a focus for investors. But bond market jitters have some questioning whether it’s time to offload those high-yield stocks.
The recent sharp rise in bond yields, while uncomfortable, was just a much-needed correction, I don’t think it requires a major shift in strategy or indeed that investors should dump high-quality equities in response. Instead investors should be selectively picking up high-quality Australian stocks, such as Wesfarmers.
Wesfarmers has been one of the market’s outstanding growth stocks, producing a compound annual growth rate of 20.9 per cent since 1984, outstripping the All Ordinaries’ 11.3 per cent.
It is the largest corporate conglomerate operating in Australia and New Zealand and comprises four segments: retail, insurance, industrial and other. The high-profile retail segment includes Coles, Target and Kmart.
The acquisition of Coles in 2007, and subsequent capital raisings, diluted Wesfarmer’s profitability; but profitability is now slowly recovering, helped by a turnaround at Coles and momentum at Bunnings and Officeworks.
Coles, the biggest earnings contributor, is strongly challenging rival Woolworths.
Coles recently reported a solid 5.4 per cent rise in headline food and liquor sales to $7.1 billion for the third quarter; Bunnings’ sales grew 12 per cent.
Wesfarmers has a strong balance sheet, with debt to equity of just 19 per cent, and dividends have increased 55 per cent since 2010. The company is forecast to pay a full-year dividend of $2.06, which at current prices is a healthy 5 per cent yield; at our target price of $40, that’s a yield of 5.15 per cent.
With that yield , the company’s shares are again attractive to income investors.