The Wesfarmers (ASX:WES) share price could offer good dividend income

Wesfarmers may be a good long-term option for dividend income.

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The Wesfarmers Ltd (ASX: WES) share price might be a good idea to consider for long-term income.

What's Wesfarmers?

You won't see the name "Wesfarmers" in a shopping centre and the parent business itself is not a leading online retailer. But Wesfarmers is one of the biggest retailers in the country with a number of category-leading retail businesses.

It operates the department store businesses Target and Kmart in Australia. The hardware store Bunnings is the crown jewel of Wesfarmers when it comes to profit generation. Office supplies business Officeworks is another leader in the portfolio. Catch is a rapidly growing e-commerce business.

Wesfarmers share price performance

The business has seen a lot of investor interest over recent times. Over the last month the Wesfarmers share price is up around 10% and in the last year it has risen by more than a third.

But Wesfarmers doesn't have much direct control over the share price performance. But it is committed to dividends and shareholder returns.

The shareholder returns goal

Wesfarmers has said that its primary objective is to "provide a satisfactory return to shareholders."

The business has a number of strategies to try to deliver on this goal.

It aims to strengthen its existing businesses through "operating excellence" and satisfying customer needs. Next, it aims to secure growth initiatives through entrepreneurial initiatives. Wesfarmers also looks to renew the portfolio through value-adding transactions. Finally, the company looks to ensure sustainability through responsible long-term management.

It has been pretty successful with this strategy. At 31 May 2021, it was able to say that its total shareholder return (which is dividends plus growth of the Wesfarmers share price) was an average of 19.9% over five years, compared to an average return of 10.5% for the All Ordinaries Accumulation Index.

Continuing strength of existing businesses

Some of the Wesfarmers businesses are producing a lot of growth, which is helping the overall Wesfarmers numbers. FY21 half-year net profit after tax (NPAT) grew by 25.5% to $1.4 billion.

There were two divisions that were largely responsible for that growth. In underlying earnings before tax (EBT) terms, Bunnings grew by 35.8% to $1.275 billion and Kmart Group saw EBT growth of 42% to $487 million.

Those two businesses, which are important drivers of the Wesfarmers share price, are also the two most profitable divisions. Bunnings saw a return on capital of 76.6% and Kmart Group saw a return on capital of 35.5%.

But Wesfarmers is always looking to improve its business. For example, it's working on improving Bunnings' commercial offer to better service builders, tradespeople and organisations. It's going to open Adelaide Tools stores outside South Australia in FY22. Wesfarmers has also agreed to acquire Beaumont Tiles.

The company is also investing to improve its supply chain efficiency to improve costs and support higher volumes.

Useful acquisitions

Management are always on the look out for acquisitions that can improve or diversify the business.

For example, it is involved with the Mt Holland lithium project and will leverage Wesfarmers' WesCEF chemical processing capabilities. Construction will commence in the second half of the 2021 calendar year with the first production expected in the second half of 2024. It's looking for further project expansion to improve returns and further "step out" opportunities in the electric vehicles value chain.

Acquisitions have been an important part of the puzzle for the Wesfarmers share price. Bunnings itself was an acquisition a few decades ago.

Wesfarmers recently launched a takeover approach for Australian Pharmaceutical Industries Ltd (ASX: API). The (first?) bid was knocked back by API.

Wesfarmers share price valuation and dividend forecast

According to Commsec, Wesfarmers share is valued at 30x FY23's estimated earnings. It's forecast to pay a dividend of $1.95 per share in FY23, translating to a grossed-up dividend yield of 4.3%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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