I think one of the most important things about investing is thinking about how much progress a business can make over the longer term, such as a five-year period. Wesfarmers Ltd (ASX: WES) shares could see significant growth by the time FY29 comes around.
Wesfarmers is best known as the operator of three key retailers – Bunnings, Kmart and Officeworks. Those businesses have performed admirably for Wesfarmers over the years, and their growth isn't expected to stop anytime soon.
Some investors may be underestimating what Wesfarmers may achieve over the next five years, so I'm going to take a look at where Wesfarmers shares may get to in that timeframe.
FY29 expectations
One of the biggest changes for the company in the next few years will be that its lithium operations should be fully functioning and profitable, which is within the WesCEF (chemicals, energy and fertilisers) segment.
Analysts had been expecting the lithium operations to be a source of future earnings before tax (EBT) growth for Wesfarmers in the near term, but that was before the lithium price's heavy decline due to higher supply and slower demand growth.
Let's look at what the owner of Bunnings and Kmart is expected to achieve in a few years from now.
The broker UBS is forecasting that Wesfarmers could make revenue of $45.35 billion in FY25 and $53.08 billion in FY29, representing a possible rise of 17% over that time.
Operating profit (EBIT) is projected to rise by 30.9% from $4.13 billion in FY25 to $5.4 billion in FY29.
The bottom line, being the net profit, is forecast to increase from $2.64 billion to $3.53 billion, an increase of 34%.
Wesfarmers' dividend could increase significantly over the next few years. UBS is projecting the payout could be $2.04 per share in FY25 and steadily grow each year to FY29, when it could reach $2.73 per share, up 33% between those financial years.
At the current Wesfarmers share price, the FY29 payout would represent a grossed-up (including franking credits) dividend yield of 5.5%
What could the Wesfarmers share price be?
It's almost impossible to predict what the market will do in the next 12 months, let alone five years.
The Wesfarmers share price is influenced by two main factors: how much earnings per share (EPS) the company generates and what multiple of profit investors are willing to pay for those earnings.
UBS predicts that Wesfarmers will generate $2.32 of EPS in FY25, meaning the business is trading at just over 30x FY25's estimated earnings. UBS also forecasts that it will generate $3.11 of EPS in FY29.
If it traded at the same price-earnings (P/E) ratio, then trading at 30x FY29's earnings would be a Wesfarmers share price of approximately $93. However, I'd suggest the P/E ratio is likely to reduce as the company becomes larger. If it traded at a P/E ratio of 27.5, then it'd be a Wesfarmers share price of $85.50. A P/E ratio of 25 would mean a share price of $77.75.
It's good to see the business projected to continue seeing profit growth, but what happens with the P/E ratio could also significantly impact shareholder returns between now and then.
