In the last year, the share price of Wesfarmers Ltd (ASX: WES) has fallen by 13%. Clearly, this is very disappointing for the company's investors but is perhaps a better performance than expected given the challenging outlook for the Aussie economy.
In fact, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has dropped by 6% in the same time period and, with consumer confidence being so weak, many retail stocks have endured much worse performance than Wesfarmers during this time.
Part of the reason for its better than expected performance is Wesfarmers' conglomerate structure, which offers diversity and a degree of resilience during weak periods for its main business of retailing. As such, Wesfarmers' bottom line is forecast to rise by 6.6% per annum during the next two years, which means that the company's dividend coverage ratio is due to increase to around 1.2 in the next financial year.
Of course, diversity in its operations provides additional consistency regarding dividend payments. Although they are due to fall in the current year, Wesfarmers has increased shareholder payouts at an annualised rate of 12.2% during the last five years and, in the financial year 2017, dividends per share are forecast to rise by 4%, which is well ahead of the current inflation rate of 1.5%.
In addition, Wesfarmers' retail sales appear to be holding up better than many investors may have expected. Its recent first-quarter update showed that Coles posted a rise in comparable sales of 2.1%, with particular strength shown in the food and liquor space, where it posted an increase of 4.7% versus the first quarter of financial year 2015.
Clearly, the medium-term outlook for the supermarket sector is a cause of concern for Wesfarmers' income investors. Realistically, Aussie consumers are likely to become increasingly price conscious as their disposable incomes come under pressure in future months, and this could draw Wesfarmers into a price war so as to stabilise its sales figures. The cost of this could be narrower margins although the company's focus on raising productivity and improving the efficiency of its supply chain should help to offset this to an extent moving forward.
Meanwhile, Wesfarmers' valuation appears to offer a sufficiently wide margin of safety that indicates it is a sound long-term buy. It trades on a price to sales (P/S) ratio of only 0.72, which is lower than that of the wider retail sector (0.8) and also below the ASX's P/S ratio of 1.4. This, coupled with its fully franked yield of 5.2%, evidence that Wesfarmers' shares offer good value for money as well as strong income potential due to the company's yield being 60 basis points higher than that of the ASX.
Although the company's shares have a beta of 0.64, the reality is that they are likely to offer a relatively volatile shareholder experience over the medium term as Wesfarmers' performance is closely linked to the fortunes of the wider economy. Despite this, Wesfarmers' conglomerate structure, productivity improvements, relatively high yield and wide margin of safety indicate that it remains a highly appealing income stock for the long term.
