Is the Wesfarmers share price a buy for dividends?

Is the Wesfarmers Ltd (ASX:WES) share price a buy for dividends with its grossed-up dividend yield of 4.8%?

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Is the Wesfarmers Ltd (ASX: WES) share price a buy for dividends with a grossed-up dividend yield of almost 5%?

Well, dividends are supported by earnings. If Wesfarmers' earnings stay strong and grow then the dividend can grow over time as well.

Wesfarmers' most recent result

In the half-year result to 31 December 2019 Wesfarmers' revenue increased by 6%, whilst net profit after tax (NPAT) and earnings per share (EPS) both rose by 57%.

Bunnings continued to be the key driver of performance. The hardware store saw earnings before tax (EBT) rise by 31% to $961 million. Officeworks was the only other division to generate growth, with EBT going up 3.9% to $79 million.

Kmart Group saw EBT fall 9.9% to $345 million, WesCEF suffered a 5.9% drop to $174 million and the Industrial & Safety EBT declined 85.7% to $6 million (which included $15 million of payroll remediation costs).

The Board of Wesfarmers reduced the interim dividend by 25% to $0.75 per share due to the demerger of Coles Group Limited (ASX: COL) and the divestment of Bengalla, so it's not surprising that the dividend was reduced to a sustainable level based on the current earnings.

In-fact, the Coles share price performance has been so good that Wesfarmers has decided to sell some more of its Coles holding, though Wesfarmers will still hold 10.1% of Coles after the latest selldown.

What about the future?

I can't see Bunnings lost its way any time soon, it's probably going to stay at the top for a long time and earnings are going to keep going up.

I'm not sure about Kmart Group, online retail hasn't had the effect I thought it would, but the Kmart & Target combination continues to struggle. Officeworks is the market leader, though it will be interesting to see how it goes if the product offering on Amazon keeps growing with better delivery options. Retail is not going to be a high-growth area for Wesfarmers for the foreseeable future.

But, Wesfarmers is looking to acquisitions to diversify and improve its growth profile. The Catch Group acquisition will hopefully significantly improve Wesfarmers' online presence and the expansion into lithium mining is quite different.

Foolish takeaway

Wesfarmers is trading at 25x FY21's estimated earnings with a grossed-up dividend yield of almost 5%. I'd prefer buying Wesfarmers shares to banks and telcos today because of its growth record and ability to acquire businesses in different industries. But, it looks quite expensive for its expected shorter-term growth.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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