Is the Wesfarmers Ltd (ASX: WES) share price a strong buy today?
Wesfarmers has actually done really well since the March 2020 COVID-19 crash in my opinion. The Wesfarmers share price dropped to $31 at the lowest point. Since then it has risen around 55% to $48.
You may think that some of Wesfarmers' businesses would be vulnerable in a global pandemic and a painful recession. But that's not what happened.
People decided to buy from Bunnings to do home DIY projects. There was also big demand for Officeworks products to set up a home office and enable school children to learn from home as well. These trends really showed through in the FY20 result.
Wesfarmers' strong FY20 result
Wesfarmers revealed a couple of months ago in its FY20 result that its continuing operations (before significant items) delivered growth of the net profit after tax (NPAT) of 8.2%. That would be a pretty good number in normal times, but during the COVID-19 pandemic I think it was a really good result.
The conglomerate reported that Bunnings' FY20 underlying EBIT went up 13.9% and Officeworks' underlying EBIT grew by 13.8%.
The Bunnings part of the result was the most important because it generates the lion's share of the overall profit. In FY20 Bunnings made 64% of the total underlying EBIT.
I think that Bunnings is one of the best retail businesses in the whole country. It has great economics, provides strong customer service and has a good online offering.
However, FY20 proved to be a difficult year for its other divisions. Kmart Group continuing operations EBIT fell 23.5%, WesCEF continuing operations EBIT fell 9.2% and the industrial and safety division saw EBIT decline 53.5%.
The Kmart Group performance wasn't too much of a surprise considering Target was already having difficulties before COVID-19 came along. It's difficult for department stores when many customers are switching to the online format of retail rather than going in to stores.
But there was a promising update for FY21 when Wesfarmers released its FY20 result. It said that the strong retail sales growth experienced in the second half of FY20 continued through July. It also said that online sales increased significantly through July and August. Some businesses like Bapcor Ltd (ASX: BAP) have shown that retail sales continued strongly for the whole of the first quarter of FY21.
Is the Wesfarmers share price a buy today?
That's the big question. At the current Wesfarmers share price it's trading at 27x FY21's estimated earnings.
It's a hefty valuation compared to previous years. But there are a few things to remember with this valuation if you think it's definitely too expensive.
Wesfarmers may be able to show a strong FY21 half-year result if the impressive retail sales continue to Christmas, justifying the higher valuation.
Another factor is that interest rates are now extremely low in Australia. This is helping push investors into riskier assets looking for a better return. The cashflows of businesses are more valuable if interest rates are lower. Wesfarmers should be valued higher because of the RBA's current position.
But the Wesfarmers share price certainly isn't a buy at any price. I'm not looking to jump on it for my own portfolio right now. But I think it is priced reasonably for an income investor to take a small starting position and buy more shares on any price weakness.
Wesfarmers has been a solid ASX dividend share for many years. Its dividend has been reset a little after the divestment of Coles Group Limited (ASX: COL), but it continues to be a really good dividend option.
It currently offers a trailing grossed-up dividend yield of around 5%. That's not a huge yield, but it's much better than what you can get from a bank at the moment. I also think that the dividend can continue to grow if Bunnings keeps performing. Perhaps Wesfarmers will soon able to make another useful acquisition.
