Wesfarmers Ltd (ASX: WES) shares have made great progress for shareholders in recent times. In three years, the Wesfarmers share price has climbed more than 40% and the business has also provided a growing annual dividend.
The past is interesting, but it's the future that counts the most for ASX share market investors.
Share prices try to reflect what profit and operational growth the company could achieve in the next few years.
There are a lot of moving parts in the Wesfarmers business because of how many different segments it has. There's Bunnings Group (which includes Beaumont Tiles), Kmart Group (including Target), Officeworks, WesCEF (chemicals, energy and fertilisers, which includes a lithium project) and more.
With that many segments, there is a lot for management to focus on. However, it also means there are a lot of growth opportunities in the next few years.
Let's consider what could happen.
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Focus areas for Wesfarmers
The biggest change in the next five years could be that the company's lithium project should be fully operational. It owns a 50% interest in the Covalent lithium project. In the recent FY25 half-year result, the company said the Kwinana refinery's construction was 95% complete and commissioning was 50% complete. The end of construction costs should help the company's financials, particularly if the lithium price improves from the current low level.
Next, Kmart. It has made wonderful progress in Australia in providing items at attractive value, and improving the quality and range of items. What's very interesting to me is the progress the company has made on the expansion of Anko products into new markets globally. It says there's a strong pipeline of partnership opportunities with major global retailers, with initial orders received from customers, including Walmart Canada. It is distributing products into the Philippines with Anko stores. I think the international growth could be considerable over the next five years.
Bunnings is already a huge business in Australia, but I believe that it can deliver further growth. It could expand its store network, add new products to the range and grow digital sales. Retail media is another area that could help grow earnings. Building activity is expected to remain subdued over the rest of FY25, but population growth and the undersupply of housing are expected to support a recovery over the medium-term.
I think the return on capital (ROC) of Bunnings and Kmart could be even higher in five years' time.
Officeworks is seeing "increased competitive intensity", but I'm hopeful the company's profit can continue rising, particularly if it can grow sales to other businesses.
Healthcare is a huge industry, and Wesfarmers has made some relatively small acquisitions to try to boost its presence. I expect that Wesfarmers' healthcare segment will contribute stronger revenue and earnings in the next five years, and I wouldn't be surprised if the business makes another acquisition in this space.
What about the profit?
Owners of Wesfarmers shares may be most interested in the profit and dividends the business could achieve.
Broker UBS is forecasting that in FY25 Wesfarmers could generate $2.69 billion of net profit and pay an annual dividend per share of $2.05.
By FY29, the broker thinks Wesfarmers could have grown its net profit by 41.5% to $3.8 billion and the dividend per share could grow by 45% to $2.98. That means, at the current price, the Wesfarmers share price is valued at 21.5x FY29's forecast profit with a possible grossed-up dividend yield of 5.9%, including franking credits.
