What: Retailing giant and conglomerate Wesfarmers Ltd (ASX: WES) plans to offer financial services for personal loans through its Coles supermarkets. It already provides general insurance such as for cars, though it will be selling its insurance business to Insurance Australia Group Limited (ASX: IAG).
So What: From mid-2015 it will work with finance company GE Capital, splitting the costs down the middle. The company hasn't announced whether it plans to apply for a banking licence, yet it and rival company Woolworths Limited (ASX: WOW) may want to enter services such as home loans and other lending in the future to keep up their steady growth.
I think this is a clever and natural move for Wesfarmers. For a $49 billion company of its size, it has to move into new markets that are large enough to make it worthwhile. The Big Four banks should be looking over their shoulders from now on.
Now What: For investors, since we don't know clearly how this will affect earnings, I think you still have to go off basic fundamentals and current share price movement for an investing decision.
1) Steady earnings and dividend growth are forecast by analysts over the next few years.
2) Its price/earnings ratio is 20- at the top of its past average PE range.
3) It is close to hitting a new all-time high.
4) It offers a healthy 4.3% dividend yield fully franked.
5) Retailing is still under pressure from weaker consumer sentiment, so its K-Mart and Target stores, which make up about 13% of revenue, are adversely affected. Bunnings Warehouse is up well (like always – a great business)
Wesfarmers: Buy, hold or sell?
I would be looking for weaker price points to start a position even if prospects look good enough to drive the share price up. It's not at a cheap price for my liking, so I would hold off. Keep it on your watchlist until it comes off the boil and then take advantage of a lower share price and possibly higher yield.
