Wesfarmers Ltd (ASX: WES) is expected to grow its dividend in FY22 on top of the growth in FY21.
One of the key objectives of Wesfarmers is to deliver satisfactory shareholder returns over the long-term.
Wesfarmers regularly takes the opportunity to pay shareholders a healthy level of its profit out as a dividend. It achieves this thanks to its profit, cashflow, "strong" balance sheet and portfolio of market-leading businesses which position it for achieving good dividends.
In FY21, Wesfarmers paid a full year dividend of $1.78 per share – that was an increase of 17.1% compared to FY20. This represented a payout ratio of 83% of continuing operations underlying earnings per share (EPS).
How much could the Wesfarmers dividend grow in FY22?
One of the brokers that has made a projection about the Wesfarmers dividend in FY22 is UBS.
The broker has projected that Wesfarmers is going to grow its annual dividend by 2.8% in FY22 to $1.83 per share. That would represent a dividend payout ratio of 90.6% of the estimated profit for the 2022 financial year, if the broker is right on both projections.
In FY23, Wesfarmers is expected by UBS to grow its dividend again to $2.08 per share. That would be a grossed-up dividend yield of 5% if the broker is right.
Is the Wesfarmers share price an opportunity?
There are not many brokers that are bullish on the business at the moment, with most analyst ratings being neutral/a hold on the company.
UBS is one of those that is neutral on the business, with a price target of $62 – a little higher than where it is right now.
But there are some brokers that are even less optimistic.
Citi actually rates Wesfarmers as a sell, with a price target of $50. That's approximately 15% lower than where it is today. Citi thinks that Wesfarmers shares are looking a bit expensive, and thinks that there are plenty of disruptions going such as the supply chain and increasing freight costs.
Investing for growth
Wesfarmers is doing a number of initiatives to try to grow the business. It's investing in data and digital capabilities, including an ecosystem that will allow a more seamless and personalised customer experience across the retail businesses.
But it's also investing for growth through acquisitions. It recently entered into a scheme implementation deed with Australian Pharmaceutical Industries Ltd (ASX: API). Wesfarmers plans to buy each API share for a price of $1.55. API's board has unanimously recommended the deal to shareholders.
Wesfarmers managing director Rob Scott says that the acquisition of API will provide an opportunity to enter the growing health, wellbeing and beauty sector. Mr Scott also said:
Wesfarmers continues to see opportunities to invest in and strengthen the competitive position of API and its community pharmacy partners by expanding ranges, improving supply chain capabilities and enhancing the online experience for customers.
Valuation
Looking at some of the projections by brokers can give a sense of how expensively the business is trading.
Citi's numbers put the Wesfarmers share price at 28x FY22's estimated earnings.
Looking at FY23, UBS has a more optimistic estimate, with the Wesfarmers share price valued at 26x FY23's estimated earnings.
