Wesfarmers Ltd (ASX: WES) shares have delivered pleasing results over time, delivering capital growth of around 30% in recent years.
In the last 12 months, the declared dividends amounted to a fully franked dividend return of 3.7% (using the share price from a year ago).
Of course, the share market is unpredictable, and we don't know what will happen next. But I think good businesses can continue to deliver profit growth and returns over time, assuming the valuation doesn't get too far ahead of itself. A high valuation can become a risk itself if it gets to euphoric levels.
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Can Wesfarmers shares deliver growth?
From the current starting point, the business has a high price/earnings (P/E) ratio.
Wesfarmers' earnings per share (EPS) were $2.26 in FY24, putting the current share price at a P/E of around 31.
The company's underlying businesses of Officeworks, Kmart Group and Bunnings continue to perform well – they are still delivering sales growth despite difficult trading conditions at present.
Bunnings is looking to expand its product range in a number of areas, while Kmart wants to expand its brand Anko to overseas markets, including Canada. Both businesses pride themselves on offering good value to customers, which could appeal in the current environment.
Broker UBS currently estimates Wesfarmers' revenue could rise 4% in FY26, helping net profit increase by 7.6% to $2.84 billion. That earnings forecast doesn't suggest to me that the Wesfarmers share price is going to jump based on short-term profit growth.
Of course, a fall in interest rates could help encourage investors to pay an even higher P/E ratio.
It's very difficult to know what earnings multiple investors will be willing to pay in the medium term.
But the factor that gives me the most confidence about Wesfarmers' shares rising in the long term is profit growth. If Bunnings, Kmart, Officeworks, and the other businesses keep growing, Wesfarmers could grow its net profit from $2.6 billion in FY25 to a much bigger number.
UBS suggests Wesfarmers could make a net profit of $3.09 billion in FY27, $3.3 billion in FY28, and $3.5 billion in FY29. If profit broadly heads towards those numbers in the next few financial years, the Wesfarmers share price could keep rising.
I don't expect a 30% rise in the next 12 months, though.
Will dividends keep rising?
The company has more control over dividend payments than the share price because the board of directors decides on the level of the payment.
Wesfarmers has a stated goal of growing the dividend. On its website, it says:
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.
So, the intention is certainly there to grow the dividend.
UBS suggests the Wesfarmers dividend per share could rise to $2.04 in FY25. That would be a fully franked dividend yield of 2.9% and a grossed-up dividend yield of 4.2%.
The broker predicts the dividend per share could rise to $2.19 in FY26, $2.39 in FY27, $2.56 in FY28 and $2.73 in FY29.
I'd prefer to buy Wesfarmers shares for a cheaper price, but it does seem likely the business can continue to deliver capital growth and dividend growth in the next few years.
