Should investors buy Wesfarmers shares for dividends?

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The Wesfarmers Ltd (ASX: WES) share price has risen by 11% over the last month. After a quick rise in a short amount of time, is the business worth owning for income?

Dividends can be an attractive way to benefit from the net profit after tax (NPAT) and cash flow that is generated by a business each day.

For readers that aren’t sure what Wesfarmers does, it’s the parent company of many recognisable retail names in Australia, including Bunnings, Kmart, Officeworks, Catch, and Target.

But, simply being a large S&P/ASX 200 Index (ASX: XJO) share that pays a dividend doesn’t automatically mean Wesfarmers shares are a buy.

Let’s have a look at the recent performance by Wesfarmers.

Last three dividends

The latest dividend from Wesfarmers was the interim dividend for the first half of FY22.

It decided to decrease the half-year dividend by 9.1% to 80 cents per share. This came after a 12.7% fall in NPAT to $1.2 billion and a 29.8% decline in the operating cash flow to $1.56 billion.

However, in the FY21 result, it increased the full-year dividend by 17.1% to $1.78 per share. This was funded by a 16.2% increase in underlying earnings per share (EPS) to $2.14.

If the earnings rise, then Wesfarmers can fund a higher dividend for shareholders.

The company says that “Wesfarmers’ primary objective is to provide a satisfactory return to shareholders”.

How will Wesfarmers drive its profit higher?

Wesfarmers says it believes it’s only possible to grow its profit over the long-term by:

  • Anticipating the needs of customers and delivering competitive goods and services
  • Looking after team members and providing a safe, fulfilling work environment
  • Engaging fairly with suppliers and sourcing ethically and sustainably
  • Supporting the communities where it operates
  • Taking care of the environment
  • Acting with integrity and honesty in all its dealings

Wesfarmers is looking to invest in a number of different areas of its business to grow earnings into the future.

I think Bunnings can continue to generate good earnings, even during this difficult period of inflation and rising interest rates.

What’s most interesting to me is the new Wesfarmers Health division. It started this after acquiring Australian Pharmaceutical Industries (API), which includes Priceline, Soul Pattinson Chemists, Clear Skincare Clinics and more.

There could be useful tailwinds to drive Wesfarmers Health earnings higher and also be helpful for Wesfarmers shares.

Wesfarmers pointed out that health is an important, large sector. The population of Aussies aged 65 and over is expected to double to 8.9 million by 2061. Customers are reportedly becoming more interested in health and wellness, with an increased focus on preventative health measures and treatment.

Data and digital can “transform” customer journeys in healthcare, improving health outcomes.

Wesfarmers said:

With strong fundamentals and the ability to leverage group capabilities, Wesfarmers Health can deliver superior returns over the long term.

It’ll be interesting to see what Wesfarmers does in healthcare and what other acquisitions it makes.

Wesfarmers dividend expectations

In FY22, according to CMC Markets, Wesfarmers is expected to pay an annual dividend of $1.66 per share. That translates into a grossed-up dividend yield of 5%.

In FY24, the projection for the dividend is $1.88 per share. That translates into a potential grossed-up dividend yield of 5.6%.

The near-term dividends seem reasonably attractive. However, I’m even more interested in Wesfarmers because of its diversification and expanding portfolio in areas with growth. For example, not only has it recently invested in healthcare, but it’s also working on a lithium mining project.

I think it would be a solid long-term pick at the current Wesfarmers share price of $47.53.

The post Should investors buy Wesfarmers shares for dividends? 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 has positions in and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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