Are BHP or Wesfarmers shares a better buy?

Should investors be more interested in the owner of Bunnings or Australia's biggest miner?

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BHP Group Ltd (ASX: BHP) shares and Wesfarmers Ltd (ASX: WES) shares are some of the most well-known and widely-held stocks on the ASX. They are two of Australia's leading ASX blue-chip shares.

They are known for their strong market positions in the respective sectors of mining and retail.

Wesfarmers owns the retailers Bunnings, Kmart, Officeworks, Target, Priceline and Catch. It also has a chemicals, energy and fertiliser business called WesCEF, a healthcare division (including Clear Skincare Clinics and Silk Laser Australia), and an industrial division (Blackwoods, Coregas and Workwear).

BHP is a huge iron ore miner, produces copper and metallurgical coal, and owns projects related to potash and nickel.

I'm going to compare the businesses on some of the main factors that would help me decide between the two.

Dividend yield

Dividends aren't everything but can make up a sizeable part of the return from an ASX blue-chip share.

Large businesses tend to have a more generous dividend payout ratio because there are fewer places for them to invest, so they can send more of the profit generated to shareholders.

The estimate on Commsec suggests that owners of BHP shares could get an annual dividend per share of $2.27 in FY24 and $2.13 in FY26, translating into forward grossed-up dividend yields of 7.5% and 7%, respectively.

The forecast on Commsec suggests owners of Wesfarmers shares could receive an annual dividend per share of $1.95 in FY24 and $2.35 In FY26, translating into forward grossed-up dividend yields of 4.1% and 5%, respectively.

BHP's yield looks more appealing in the shorter term, but Wesfarmers' dividend is growing in the right direction.

Growth prospects

Wesfarmers has several impressive businesses that have steadily grown their profits over the years. Kmart and Bunnings are well situated to succeed in the current environment because they can provide customers with a strong value offering.

The retail giant is making good moves to expand its presence in long-term growth industries such as healthcare, a sector where Wesfarmers can utilise its scale and capabilities in numerous ways.

According to Commsec, Wesfarmers is expected to generate earnings per share (EPS) of $2.23 in FY24, which could grow by 21% to $2.70 in FY26.

BHP is working on growing its iron ore production with improved efficiency and infrastructure in Australia. In recent times, the business has endeavoured to grow its exposure to copper, first with the acquisition of Oz Minerals and then the recent failed attempt at Anglo American. It's clear the business wants to increase its exposure to future-facing commodities.

BHP's potash project in Canada, Jansen, could also be a compelling earnings generator once operational.

The forecast for BHP EPS is $4.19 in FY24 and $3.82 in FY26, a reduction of 9%.

Is this a good time to invest?

Of the two businesses, I prefer Wesfarmers because of its track record of compounding earnings and its underlying value over time.

With miners, I think it's better to invest when there's a cyclical opportunity to do so. With the iron ore price above US$105 per tonne, I don't think it's in 'weak' territory yet.

I believe Wesfarmers is more likely to be able to keep growing its earnings over the rest of the decade – it does not rely on a positive commodity price change.

Wesfarmers shares are not cheap either, but I like its long-term prospects, particularly as it invests in long-term growth industries.

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

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