The Wesfarmers Ltd (ASX: WES) share price has delivered investors excellent capital growth in recent times. In the last year alone, it has gone up more than 30%, as the chart below shows. But that has created problems for investors interested in passive income.
When a share price goes up, it pushes down the dividend yield for prospective investors.
For example, if a business has a 4% dividend yield and the share price rises 10%, the dividend yield becomes 3.6%. Future dividend hikes by the company can help boost the yield again, but until then, new investors need to accept the lower yield.
As I've mentioned, Wesfarmers shares have risen by more than 10% in the last 12 months. So, let's first look at what the dividend yield may be now.
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Projected dividend yield
I'm going to focus on future dividend payments rather than the yield of FY24 because those payments are history – I think it's what comes next that is much more important.
Also, while I will mention the potential FY25 dividend yield, it's important to remember the company has already sent the half-year payout to shareholders a few months ago.
According to the projection on Commsec, Wesfarmers is predicted to pay an annual dividend per share of $2.05 in FY25. At the current Wesfarmers share price, this would translate into a fully franked dividend yield of 2.4% and a grossed-up dividend yield of 3.4%, including franking credits.
But, considering we have just entered the 2026 financial year, I think it's worthwhile looking at the potential FY26 payout too. The projection on Commsec for FY26 is $2.11 per share, which would be a fully franked dividend yield of 2.5% and a grossed-up dividend yield of 3.5%, including franking credits.
Is the Wesfarmers share price a buy for passive income?
The company's dividend yield is decent, but it's not exactly huge.
I believe the more important question is whether the overall valuation is appealing.
The rapid rise of the Wesfarmers share price has pushed up the price-earnings (P/E) ratio, which on the face of it makes the business seem more expensive than it was before.
According to Commsec, the retail giant (which owns Bunnings, Kmart, Officeworks, and others) is projected to generate $2.33 of earnings per share (EPS) in FY25. That means it's currently valued at 37x FY25's estimated earnings.
It's not cheap, but not many great businesses are right now.
Is Wesfarmers worth a higher earnings multiple than before? I think it is. Bunnings and Kmart continue to demonstrate the ability to deliver a high return on capital and the potential to continue growing.
I'm particularly excited by the Kmart initiative to sell Anko products into the regions of North America and Asia, which both have large addressable markets and give plenty of growth potential for the ASX share. Plus, Kmart is doing incredibly well in Australia, with both sales and margins continuing to impress.
In the FY25 half-year result, Wesfarmers reported that Bunnings achieved a return on capital (ROC) of 71.5% and Kmart Group achieved a ROC of 65.9%, up 5.7 and 7.1 percentage points, respectively. This demonstrates the exceptionally high quality of the two primary profit generators of Wesfarmers, highlighting how ongoing investment in these businesses is likely to deliver significant earnings growth for shareholders.
I still believe the Wesfarmers share price is an excellent long-term buy, but I wouldn't call it amazing value today.
