There are many reasons to consider owning Wesfarmers Ltd (ASX: WES) shares.
Are Wesfarmers Ltd shares a buy?
First, let's look at the bull case. That is, let's see why an investor would want to buy in today. In no particular order, we have:
- Management: Wesfarmers' management teams tend to hang around. That's a good thing because it means CEOs take ownership of their roles and can see their strategies through. The current team is highly experienced.
- Brand strength: Coles, Bunnings Warehouse, Kmart, Target, Officeworks; Wesfarmers' businesses dominate their respective industries. And it didn't happen by chance.
- Investing for growth: Unlike some retailers, Wesfarmers recognises the need to adapt to online. In my opinion, it appears streets ahead of competitors in some of the most important aspects.
- Dividends: Wesfarmers shares are expected to yield a dividend equivalent to a yield of more than 5% fully franked in the year ahead.
Now, for some risks:
- Amazon: Amazon is rumoured to be about to enter the Aussie market. As Wesfarmers CEO Richard Goyder said in 2014, "I think Amazon is the biggest threat that we've got to our business model at the moment".
- Woolworths Limited (ASX:WOW), Aldi and Costco: Competition for Wesfarmers' primary profit printer, Coles, could heat up. Aldi is growing and Costco has only just got started. Meanwhile, Woolies is out to make a point.
- Valuation: At today's share prices, Wesfarmers shares appear expensive. Indeed, the valuation does reflect its premium brand portfolio and stable nature.
- 'The great unwind': In recent years, investors from around the globe have flocked to defensive businesses such as Wesfarmers in the hope of a superior dividend income. However, interest rates look like they are about to turn, which could see some big selling pressure on stocks like Wesfarmers. I don't really consider this a unique risk but it's worthy of a mention nonetheless.
Foolish Takeaway
Wesfarmers shares have a lot of appealing features. But if I were to buy it at today's prices, I'd want to have a really good handle of those risks mentioned above. I don't think any of them are material right now but they could spook the market given the chance.
Until its share price retreats, I'm not a buyer of Wesfarmers shares.
