Can Wesfarmers shares keep beating the ASX 200 index?

The Wesfarmers share price rose 32% in the past year.

| More on:
a fashionable older woman walks side by side with a stylish younger woman in a street setting as they both smile at something they are talking about.

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

If you own shares of Wesfarmers Ltd (ASX: WES), congratulations!

Over the past year, the Wesfarmers share price has surged 32% to reach $65.18, outperforming the S&P/ASX 200 Index (ASX: XJO), which has grown 8% in the same period.

This remarkable performance can be attributed to the strength of Wesfarmers' renowned retail brands, such as Bunnings, Kmart, and Officeworks. After all, who doesn't enjoy visiting these stores on the weekends?

Beyond retail, Wesfarmers also maintains diverse business interests spanning chemicals, industrials, and healthcare providers.

Given its strong portfolio and recent performance, the question remains: Can Wesfarmers shares continue to deliver superior returns going forward?

What drives share price performance?

The share price of a company can be understood by looking at two key factors: earnings per share (EPS) and the price-to-earnings (PE) ratio.

EPS measures a company's profit divided by the number of shares it has. The PE multiple shows how much investors are willing to pay for each dollar of earnings. By multiplying the EPS by the PE multiple, we get the share price.

For example, Wesfarmers' FY25 EPS estimate of $2.48 and a PE multiple of 26 lead to its share price of $65.18, based on S&P Capital IQ. If the EPS rises to $3, the share price will increase to $78, assuming the PE multiple stays the same.

Thus, share prices change based on both the company's earnings and investor sentiment.

Earnings growth expectations

Wesfarmers' EPS estimates over the next three years appear to assume the company will soon resume a double-digit profit growth. Using S&P Capital IQ estimates, EPS estimates for Wesfarmers are:

  • $2.25 in FY24, implying a 3.4% growth over the previous year
  • $2.48 in FY25, implying a 10.3% growth over the previous year
  • $2.76 in FY26, implying a 11% growth over the previous year

As we reviewed previously, Wesfarmers' business results this year have been mixed. The company's strong retail businesses continue to perform well, but hopes for its upcoming lithium mining venture have lost shine due to weak global commodity prices.

Looking ahead, the company remains confident about its retail business and, as my colleague Tristan highlighted, it expects lithium hydroxide production to commence in the first half of the 2025 calendar year.

PE multiples are high

Wesfarmers shares are currently trading at 26x FY25 earnings estimates. Historically, their PE multiples have ranged from 15x to 32x, making the current valuation relatively high.

Comparing Wesfarmers to its peers, based on earnings estimates provided by S&P Capital IQ:

  • Woolworths Group Ltd (ASX: WOW) shares are valued at 23x FY25's estimated earnings.
  • Coles Group Ltd (ASX: COL) shares are valued at 20x FY25's estimated earnings.

Given this context, it seems unlikely that Wesfarmers' PE multiple will increase significantly from its current level.

Can Wesfarmers shares outperform the ASX 200?

Over the last 10 years, the ASX 200 Index generated a total return of 7.6%, including a dividend yield of 4.7%.

As discussed, Wesfarmers shares have the potential to outperform the index if the company achieves the expected 10% EPS growth while maintaining a 26x PE multiple. However, the success of this largely depends on the progress of its lithium projects and the direction of global commodity prices in particular.

Despite this uncertainty, Wesfarmers remains one of the top dividend payers on the ASX, currently offering a fully franked dividend yield of 3%. While it's challenging to predict when lithium prices will rise, Wesfarmers shares can be a valuable addition for dividend-focused investors.

Motley Fool contributor Kate Lee 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 Coles Group and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

red percentage sign with man looking up which represents high interest rates

Which ASX shares to buy if interest rates rise (and which to avoid)

There is a growing danger of interest rates rising in Australia.

Read more »

A view of competitors in a running event, some wearing number bibs, line up together on a starting line looking ahead as if to start a race.

1 ASX stock that's just right for beginner investors

I believe this stock could provide a pleasing mixture of dividends and growth.

Read more »

Friends at an ATM looking sad.
Bank Shares

3 reasons I think the CBA share price may crash!

I see CBA shares going just one way from here...

Read more »

A young woman holds a red chilli in front of her mouth with eyes wide open looking happy about the Hot Chili share price today

Should I buy Guzman Y Gomez shares on the ASX?

Is the growth story enough to get GYG over the line and into my portfolio?

Read more »

a man wearing a hard hat, a shirt and a tie, lays a brick on a wall he is building with a look of happy joy on his face.

I think this ASX 200 stock is a tremendous bargain today

This ASX share seems to be trading for a lot less than it’s worth.

Read more »

Cybersecurity professional man inspects server room and works on ipad

The smartest ASX ETF to buy with $1,000 right now

One ETF stands out to me on the markets this June..

Read more »

A woman in a hammock on her laptop and drinking a smoothie
Dividend Investing

For a shot at $1,320 a year in passive income, buy 2,000 shares of this ASX stock

Here's why I can't go past this share for passive income on the ASX.

Read more »

Man in yellow hard hat looks through binoculars as man in white hard hat stands behind him and points.

Are Fortescue shares a contrarian buy after falling 20% in a month?

Are investors putting too much weight on the jitters of the market or is the Fortescue fall fair?

Read more »