The Wesfarmers Ltd (ASX: WES) share price has fallen from 26 April 2023, and it's down over 20% from the peak in August 2021, as we can see on the chart below.
As one of the largest businesses in Australia, it's highly linked to the Australian economy with businesses like Bunnings, Officeworks, Kmart and Target.
Chief economist of AMP Ltd (ASX: AMP), Shane Oliver recently said (according to reporting by the Australian Financial Review):
The risk of recession in Australia is now very high.
Our assessment remains that the RBA has already done enough to slow the economy and bring inflation back to target and we are seeing clear evidence of slowing demand in terms of falling real retail sales, falling building approvals, slowing plans for growth in business investment, slowing GDP growth and early indications of a slowing jobs market.
That's certainly a worrisome outlook for the wider economy. That could cause difficulties for Wesfarmers shares in FY24, but management is confident.
What could help the Wesfarmers share price thrive in this environment?
The Wesfarmers managing director Rob Scott said:
First, the majority of our businesses provide essential and everyday products, which gives us a level of resilience at times when household or business budgets come under pressure.
Second, our retail businesses are known for their strong value credentials and everyday low prices. As inflation and cost of living pressures increase, we expect value to become even more important to customers. We have already seen evidence of this in our sales data and customer surveys, with more customers trading down between categories and increasing their share of spend on more value-oriented products.
Third, we are well advanced with productivity initiatives to mitigate cost pressures, and are well placed with our inventory positions, cost structure, and offers to customers.
In addition to these points, we have a strong and flexible balance sheet that provides us with the capacity to support continued investment for the long term and take advantage of value-accretive opportunities that may arise.
In summary, Wesfarmers' leadership believe that its businesses are well-positioned for the current environment.
Of course, the dividends are expected to keep flowing to shareholders through this period, which could be attractive and rewarding for shareholders.
Using Commsec numbers, it's projected to pay an annual dividend per share of $1.84 in FY23 and $1.91 in FY24. That translates into grossed-up dividend yields of 5.5% and 5.7%, respectively.
Wesfarmers' defensive earnings could benefit from the enlarged healthcare division in FY24, and the business may be looking for further acquisition opportunities.
It could come down to how resilient the company's retail operations are. As Best & Less Group Holdings Ltd (ASX: BST) has shown, just because a retailer sells value clothing, doesn't mean they're guaranteed to do well in this economic situation.
What is the valuation?
According to Commsec, the company could generate earnings per share (EPS) of around $2.20 in FY24. This would put the Wesfarmers share price at 22 times FY24's estimated earnings, which could be cheap enough for the business to do well.
