Is the Wesfarmers (ASX:WES) share price a buy for the 5% dividend yield?

The current Wesfarmers Ltd (ASX: WES) share price may offer a grossed-up dividend yield of 5% in FY22. Does this make it good enough to consider?

Since the start of the year, the Wesfarmers share price has fallen by 18.5%.

Not only are the shares cheaper than they were before, but it also means that the prospective dividend yield is bigger.

Wesfarmers is committed to achieving good shareholder returns. Its dividend is a sizeable part of that overall effort. That dividend is funded by the earnings of several businesses including Bunnings, Kmart, Officeworks and Target.

How big will the Wesfarmers dividend be in FY22?

Only the Wesfarmers board can decide how big the dividend payments will be. The board members may not have decided yet on the final dividend payment for the 2022 financial year.

However, analysts do like to try to estimate how large they think the dividend is going to be.

Commsec numbers suggest an estimated annual dividend of $1.66. At the last Wesfarmers share price, that represents a grossed-up dividend yield of FY22.

In the FY22 half-year result, the business decided to reduce the interim dividend by 9.1% to $0.80 per share. That came after a 12.7% reduction in net profit after tax (NPAT) and a 29.8% decline in the operating cash flow.

Why did the profitability drop?

Management said that the first six months of FY22 represented the most disrupted period for its businesses since the start of COVID-19 with extended store closes and trading restrictions.

However, the company pointed to continued resilience by Bunnings with its operating model and ability to meet its customers’ needs in a difficult operating environment, delivering sales growth for the half, despite cycling very strong demand in the prior year.

The company also continues to invest in its data and digital ecosystem, including the investment in the shared data asset and scalable customer data architecture as well advanced analytics, specialist technical expertise and robust data governance.

Is the Wesfarmers share price a buy for dividends?

The FY22 dividend isn’t the only dividend to think about. Commsec numbers say that in FY23 Wesfarmers is expected to pay a dividend of $1.81 per share and in FY24 it will pay an annual dividend of $1.93 per share. That translates into a grossed-up dividend yield of 5.3% in FY23 and 5.6% in FY24.

The broker Morgans currently rates it as a buy, with a price target of $58.50. Whilst the company is suffering from a number of COVID impacts, such as supply chain effects and more inventory, it thinks that Wesfarmers will come back stronger when these issues subside.

On Morgans’ numbers, the Wesfarmers share price is valued at 25x FY22’s estimated earnings.

The post Is the Wesfarmers (ASX:WES) share price a buy for the 5% dividend yield? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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