Wesfarmers Ltd (ASX: WES) shares have excelled at delivering capital growth in the past year, boasting a 30% increase over the 12 months, as shown in the chart below.
Capital growth is only one element of a shareholder's ASX returns, though – dividends also play their part.
While share prices move daily depending on what people are willing to pay, dividends are typically much more consistent. That's because they are decided by a company's board of directors and influenced by how much profit the business is generating.
Many investors prefer to focus on dividend returns because they are a 'real' return without requiring share sales. Owning a solid, dividend-paying stock may also help investors sleep easier at night.
With that in mind, can Wesfarmers shares tick the ASX dividend box?
Generous dividend payout ratio
A company needs to make a profit before it can pay a dividend. Wesfarmers has been making a profit for decades, so there is no problem there.
Leadership must decide how much of the company's profit it will pay out as a dividend. This metric is called the dividend payout ratio. Paying out 100% of the net profit after tax (NPAT) may not be sustainable if the business needs to reinvest in its operations to sustain/grow earnings in the future.
Ideally, a business is able to balance rewarding shareholders in the short term with growing the business in the long term.
In the FY24 first-half result, the business reported it generated earnings per share (EPS) of $1.258 (up 3.4% year over year). This enabled Wesfarmers to pay an interim dividend per share of 91 cents, an increase of 3.4% compared to the FY23 interim dividend.
That HY24 dividend represented a dividend payout ratio of 72% of profit, which I believe strikes the right balance between dividend payments and funding growth.
Wesfarmers is investing in its businesses, such as expanding the Kmart brand Anko to international markets, including Canada. The ASX share is also part of a lithium project at Mt Holland, which is utilising capital to get the mine operational.
The last two dividends declared by Wesfarmers total $1.94 per share, which equates to a fully franked dividend yield of around 3% and a grossed-up dividend yield of 4.4%. That's not bad, but it's not the biggest yield around.
What are the chances of owners of Wesfarmers shares getting larger ASX dividends in the future?
Intention to grow the dividend
Wesfarmers says it wants to deliver long-term shareholder returns, with part of that being the dividend payout. As part of its capital management, the company said:
With a focus on generating strong cash flows and maintaining balance sheet strength, the Group aims to deliver satisfactory returns to shareholders through improving returns on invested capital.
As well as share price appreciation, Wesfarmers seeks to grow dividends over time commensurate with performance in earnings and cash flow.
The estimate on Commsec suggests the Wesfarmers dividend can grow to $2.12 per share in FY25 and $2.36 per share in FY26. If that happens, the Wesfarmers grossed-up dividend yield could be 5.3%.
With a decent starting dividend yield, potential dividend growth in the next two years and a portfolio of solid businesses like Bunnings, Kmart, and Officeworks, I'd rate Wesfarmers shares as a solid option for ASX dividends.
