Are the blue chip S&P/ASX 200 Index (ASX:XJO) shares in this article worth buying? One consideration is Wesfarmers Limited (ASX:WES).
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S&P/ASX 200 Index (ASX: XJO) shares are popular investments. Are the ones in this article worth buying? I’m going to look at Wesfarmers Ltd (ASX: WES), Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) and Fortescue Metals Group Ltd (ASX: FMG).
Are any of these ASX 200 shares worth buying?
Since the start of the year the Wesfarmers share price is actually up just over 10% even though it has actually dropped 7.3% over the last month.
FY20 was a mixed result. Excluding significant items, net profit rose 8.2%. However, FY20 did see impairments for both Kmart Group and the industrial and safety division.
Looking at the underlying performance (excluding significant items) across the divisions, Bunnings earnings before interest and tax (EBIT) rose 13.9%, Kmart Group (continuing operations) EBIT fell 23.5% to $413 million, Officeworks EBIT rose 13.8% to $190 million, WesCEF (chemicals, energy and fertilisers) EBIT dropped 9.2% to $393 million and the industrial and safety EBIT plunged 53.5%.
I like the diversification offered by the ASX 200 share’s various subsidiaries. One of the best attractive things about Wesfarmers is that it can invest into other industries if it wants to such as lithium mining with the Kidman Resources acquisition. That should allow it to remain relevant for many years to come.
Overall underlying profit growth is good. But is the Wesfarmers share price a good buy now? It’s trading at 24x FY22’s estimated earnings. I think it has fallen enough to be a decent buy today, but I wouldn’t buy a huge amount.
It currently offers a grossed-up dividend yield of 5.3%.
Fisher & Paykel Healthcare
Since the start of the year the Fisher & Paykel Healthcare share price has risen by 47%, however over the past month it has fallen 9.2%.
The company is actively involved in the fight against COVID-19 because it produces devices used to help patients.
In the ASX 200 share’s recent trading update for the first four months of FY21 it reported hospital hardware sales up 390%, hospital consumable revenue up 48% and overall hospital product revenue up 91%.
For the world’s sake, I hope demand for COVID-19-related equipment slows down sooner rather than later. However, Fisher & Paykel Healthcare is unfortunately still seeing increased demand because of the unfortunate situation and it may be a decent idea as a hedge against COVID-19 impacts on most other businesses.
At the current Fisher & Paykel Healthcare share price it’s valued at 49x FY21’s estimated earnings.
Fortescue Metals Group
Since the start of the year the Fortescue Metals Group share price has risen by 47.6%. Over the past month it has fallen by 17.6%.
The iron ore price has remained strong during this difficult year with strong demand from China and disrupted supply from competition in Brazil because of COVID-19.
FY20 was an incredible result with underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rising by 38% and net profit going up by 49% to US$4.7 billion.
The dividend was huge from the ASX 200 share, with a full year payment of $1.76 per share. That amounted to a total of US$3.7 billion, or a dividend payout ratio of 77% of full year net profit.
Also pleasingly was that net debt reduced by US$1.8 billion to US$258 million thanks to the strong level of cashflow by the ASX 200 share. In FY20 it generated operating cash of US$6.4 billion, up 47% compared to the prior year.
At the current Fortescue Metals Group share price it’s trading at under 7x FY21’s estimated earnings. It offers a trailing grossed-up dividend yield of 15.8%.
Fortescue has done very well, however it’s a question of how long iron ore prices remain strong – commodity prices are hard to predict.
Both Fortescue and Fisher & Paykel Healthcare are great ASX 200 shares, but I don’t know how long demand will remain elevated. It might be better to wait for less demand which may result in a lower price. So, I’d prefer to buy Wesfarmers. Though there are other ASX 200 shares I’d rather buy first.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.