ASX:WES

Wesfarmers‘ officials have credited their conglomerate structure for a 13.2% increase in half-year net profits to $1.57 billion. This result was well above the street’s expectation of $1.47 billion.

The company announced it will increase its interim dividend to $1.03 from 91 cents, payable on March 28th. Wesfarmers’ revenue grew by 4.3% to $34.9 billion, and EBIT were up 15.1% to 2.42 billion.

The strongest results from the conglomerate came from the industrial division, where earnings rose from $22 million to $377 million, largely from the $256 million turnaround in resources as coal prices moved higher during the quarter.

On the other side of the ledger, Coles’ same store sales grew by 1.3%, but lower prices meant revenue from the supermarket remained steady and earnings fell 6.8% .

Over the last four years, Wesfarmers’ share price has traded in an $8.00 range between $38.00 and $46.00. Although the diversified company has consistently paid out fully franked dividends and has been yielding around 5% over the past few years, the lack of share price appreciation has been a concern for longer-term shareholders.

While the Bunnings division of the company has been gaining market share with the demise of Masters, it seems the market rates Wesfarmers earnings lower reflecting a view that the Coles division faces increased competition from the discount chain, Aldi.

Wesfamers has also entered the UK hardware sector with the acquisition of Homebase January of this year, which has yet to show a similar level of success as the Bunnings division.

We don’t expect the limited upside of the share price to improve anytime soon and will continue to employ the covered call strategy on rallies up to the $43.00 area; collecting the franking credits, a dividend of over $2.00 per share and the option premium. Our strategy is helping to boost cash flow to 13%+ per annum

Wesfarmers reported notably weaker 1Q17 sales performance which has weighed heavily on the share price. However, excluding UK home improvement and convenience stores, overall sales rose by 3.4% to $12.9 billion.

Overall, FY17 NPAT has been marginally upgraded as positive price developments in their resources divisions offset lower revenue numbers from Target and Coles. Based on Fy17 DPS of $2.30, Wesfarmers is on 5.2% forward yield.

The share price has dropped close to $5.00 over the last four trading sessions and posted a 3 month low of $40.00 last Friday.

We see value emerging again as the stock now trades back at a support level that has been maintained since June 2013. Buy range of $39 – $40 and sell range of $43 – $44. Using covered calls we’re able to boost the cash flow to 10%+ per annum from the dividend, franking credit and call option premium.

Wesfarmers (WES.ASX) reported NPAT of $2.25b and announced a final dividend of $0.95. Coles delivered total sales growth of 3.5%, whilst Bunnings was again the standout with 10%+ in underlying growth year on year.

FY17 forecast dividends of $2.10, places the stock on a forward yield of 5%.

We own WES in the model from lower price levels and we’ve sold covered calls into December to enhance the return.