Should investors buy Wesfarmers shares for dividends?

Is this ASX blue chip a good shout for income? Let's have a look.

| More on:
Couple counting out money

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Wesfarmers has a long record of paying dividends to shareholders
  • The FY22 dividend may be reduced in line with a fall in profit
  • However, rising profit in FY24 could fund a bigger dividend

The Wesfarmers Ltd (ASX: WES) share price has risen by 11% over the last month. After a quick rise in a short amount of time, is the business worth owning for income?

Dividends can be an attractive way to benefit from the net profit after tax (NPAT) and cash flow that is generated by a business each day.

For readers that aren't sure what Wesfarmers does, it's the parent company of many recognisable retail names in Australia, including Bunnings, Kmart, Officeworks, Catch, and Target.

But, simply being a large S&P/ASX 200 Index (ASX: XJO) share that pays a dividend doesn't automatically mean Wesfarmers shares are a buy.

Let's have a look at the recent performance by Wesfarmers.

Last three dividends

The latest dividend from Wesfarmers was the interim dividend for the first half of FY22.

It decided to decrease the half-year dividend by 9.1% to 80 cents per share. This came after a 12.7% fall in NPAT to $1.2 billion and a 29.8% decline in the operating cash flow to $1.56 billion.

However, in the FY21 result, it increased the full-year dividend by 17.1% to $1.78 per share. This was funded by a 16.2% increase in underlying earnings per share (EPS) to $2.14.

If the earnings rise, then Wesfarmers can fund a higher dividend for shareholders.

The company says that "Wesfarmers' primary objective is to provide a satisfactory return to shareholders".

How will Wesfarmers drive its profit higher?

Wesfarmers says it believes it's only possible to grow its profit over the long-term by:

  • Anticipating the needs of customers and delivering competitive goods and services
  • Looking after team members and providing a safe, fulfilling work environment
  • Engaging fairly with suppliers and sourcing ethically and sustainably
  • Supporting the communities where it operates
  • Taking care of the environment
  • Acting with integrity and honesty in all its dealings

Wesfarmers is looking to invest in a number of different areas of its business to grow earnings into the future.

I think Bunnings can continue to generate good earnings, even during this difficult period of inflation and rising interest rates.

What's most interesting to me is the new Wesfarmers Health division. It started this after acquiring Australian Pharmaceutical Industries (API), which includes Priceline, Soul Pattinson Chemists, Clear Skincare Clinics and more.

There could be useful tailwinds to drive Wesfarmers Health earnings higher and also be helpful for Wesfarmers shares.

Wesfarmers pointed out that health is an important, large sector. The population of Aussies aged 65 and over is expected to double to 8.9 million by 2061. Customers are reportedly becoming more interested in health and wellness, with an increased focus on preventative health measures and treatment.

Data and digital can "transform" customer journeys in healthcare, improving health outcomes.

Wesfarmers said:

With strong fundamentals and the ability to leverage group capabilities, Wesfarmers Health can deliver superior returns over the long term.

It'll be interesting to see what Wesfarmers does in healthcare and what other acquisitions it makes.

Wesfarmers dividend expectations

In FY22, according to CMC Markets, Wesfarmers is expected to pay an annual dividend of $1.66 per share. That translates into a grossed-up dividend yield of 5%.

In FY24, the projection for the dividend is $1.88 per share. That translates into a potential grossed-up dividend yield of 5.6%.

The near-term dividends seem reasonably attractive. However, I'm even more interested in Wesfarmers because of its diversification and expanding portfolio in areas with growth. For example, not only has it recently invested in healthcare, but it's also working on a lithium mining project.

I think it would be a solid long-term pick at the current Wesfarmers share price of $47.53.

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 has positions in and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Two adults and a child look happy as they walk through airport with child sitting on suitcase.
Dividend Investing

Will Qantas shares pay a dividend in 2024?

Will the dividends return this year? Let's find out.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Dividend Investing

2 market-leading ASX dividend stocks to buy in April

Analysts have put buy ratings on these market-leaders.

Read more »

Father in the ocean with his daughters, symbolising passive income.
Dividend Investing

I'd spend $8k on these ASX 200 shares today to target a $6,102 annual passive income

I believe these ASX 200 shares will continue rewarding passive income investors for years to come.

Read more »

Man holding Australian dollar notes, symbolising dividends.
ETFs

Want the latest dividend from the Vanguard Australia Shares ETF (VAS)? Here's what you have to do

If you want to bag the latest VAS dividend, here's what you need to do.

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Dividend Investing

Investing for passive income? Keep any eye out for that boosted Telstra dividend today!

If you own Telstra shares, keep an eye out for that juicy dividend payout today.

Read more »

A happy construction worker or miner holds a fistfull of Australian money, indicating a dividends windfall
Dividend Investing

Invest $12,000 in Woodside stock and get $5,700 in passive income

Reliable dividend shares are everywhere on the ASX. Here's how you could use that to your advantage.

Read more »

Australian dollar notes in businessman pocket suit, symbolising ex dividend day.
Dividend Investing

3 ASX 300 dividend shares to buy in April

These shares have been named as buys by brokers and tipped to offer very attractive yields.

Read more »

A couple of friends at a rooftop party enjoying some hot and tasty Domino's pizza
Dividend Investing

Own Domino's shares? Today is pay day!

Eligible Domino’s shareholders can expect some welcome passive income today.

Read more »