Buying Wesfarmers Ltd (ASX: WES) shares could be a smart move for the long-term because of the high-quality businesses it operates and its impressive long-term record. However, there are a few aspects of this impressive business that investors should keep in mind.
The company is the owner of some of Australia's leading retail names such as Bunnings, Kmart, Officeworks, Priceline and Target. It also has other businesses including WesCEF (chemicals, energy and fertilisers), an industrial and safety division, and healthcare businesses like InstantScripts, skincare clinics and more.
When it comes to assessing a large blue-chip like this, I think it's a good idea to consider whether the business will be able to continue growing profit. I don't want to own a slow-growing company. Let's consider the positives first.
Pleasing aspects of Wesfarmers shares
Kmart and Bunnings are two of the most impressive operators in the retail sector, in my opinion. In FY25, both businesses delivered revenue growth and faster earnings growth.
Bunnings Group saw revenue rise 3.3% to $19.6 billion and earnings increase 3.8% to $2.3 billion. Kmart Group's revenue climbed 2.9% to $11.4 billion and earnings grew 9.2% to $1.05 billion.
At the annual general meeting (AGM), Wesfarmers revealed that both Bunnings and Kmart had continued growing in FY26 to October. If these two businesses continue growing, the company is likely to have a positive future, particularly with their high returns on capital (ROC).
In FY25, Bunnings' ROC was 71.5% and Kmart's was 67.6%. With such a high return, it shows how profitable Wesfarmers is with the amount of money allocated to those businesses. It also suggests very strong returns on additional capital invested in those businesses.
I'm impressed by Wesfarmers' ability to find other growth avenues for each of these businesses to generate earnings. For example, Bunnings has expanded in pet care and auto care, while Kmart is selling Anko products in North America and the Philippines.
In FY26, I'm also hopeful that the healthcare and WesCEF divisions can improve their earnings following a period of investment (particularly with the new lithium project – Wesfarmers is a joint venture partner in the Covalent lithium project). Lithium production is expected to ramp-up to the end of FY27.
Analysts are forecasting ongoing profit growth for owners of Wesfarmers shares in FY26 and beyond. Broker UBS projects net profit of $2.8 billion in FY26, $3.08 billion in FY27, $3.46 billion in FY28, $2.8 billion in FY29 and $4.2 billion in FY30.
Negative aspects to consider
It's good to see that the company is predicted to grow profit, however its price/earnings (P/E) ratio has increased over time.
According to UBS, the P/E ratio for Wesfarmers shares was 22 in FY23, 25.7 in FY24 and 31.5 in FY25.
Based on the UBS projection for FY26, the Wesfarmers share price is trading at 33x FY26's estimated earnings. I do believe that the ASX blue-chip share is worthy of trading at a higher P/E ratio than FY23, but investors should be cautious about paying an increasingly high P/E ratio – it needs to justify the valuation with earnings growth.
We should also be aware that the larger Bunnings and Kmart become, the more Wesfarmers may be reliant on the earnings of those powerhouses.
I'm expecting long-term success for the Wesfarmers, but it's not as cheap as it was, and I'm monitoring the growth plans of the two big retail divisions to see if the bottom line can continue climbing at a good pace. Having said that, I still think the Wesfarmers share price is a good long-term buy.
