Can Wesfarmers shares keep beating the ASX 200 index?

The Wesfarmers share price rose 32% in the past year.

| More on:
a fashionable older woman walks side by side with a stylish younger woman in a street setting as they both smile at something they are talking about.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you own shares of Wesfarmers Ltd (ASX: WES), congratulations!

Over the past year, the Wesfarmers share price has surged 32% to reach $65.18, outperforming the S&P/ASX 200 Index (ASX: XJO), which has grown 8% in the same period.

Created with Highcharts 11.4.3Wesfarmers + S&P/ASX 200 Price Return (AUD) PriceZoom1M3M6MYTD1Y5Y10YALL3 Jul 202328 Jun 2024Zoom ▾Sep '23Nov '23Jan '24Mar '24May '240www.fool.com.au

This remarkable performance can be attributed to the strength of Wesfarmers' renowned retail brands, such as Bunnings, Kmart, and Officeworks. After all, who doesn't enjoy visiting these stores on the weekends?

Beyond retail, Wesfarmers also maintains diverse business interests spanning chemicals, industrials, and healthcare providers.

Given its strong portfolio and recent performance, the question remains: Can Wesfarmers shares continue to deliver superior returns going forward?

What drives share price performance?

The share price of a company can be understood by looking at two key factors: earnings per share (EPS) and the price-to-earnings (PE) ratio.

EPS measures a company's profit divided by the number of shares it has. The PE multiple shows how much investors are willing to pay for each dollar of earnings. By multiplying the EPS by the PE multiple, we get the share price.

For example, Wesfarmers' FY25 EPS estimate of $2.48 and a PE multiple of 26 lead to its share price of $65.18, based on S&P Capital IQ. If the EPS rises to $3, the share price will increase to $78, assuming the PE multiple stays the same.

Thus, share prices change based on both the company's earnings and investor sentiment.

Earnings growth expectations

Wesfarmers' EPS estimates over the next three years appear to assume the company will soon resume a double-digit profit growth. Using S&P Capital IQ estimates, EPS estimates for Wesfarmers are:

  • $2.25 in FY24, implying a 3.4% growth over the previous year
  • $2.48 in FY25, implying a 10.3% growth over the previous year
  • $2.76 in FY26, implying a 11% growth over the previous year

As we reviewed previously, Wesfarmers' business results this year have been mixed. The company's strong retail businesses continue to perform well, but hopes for its upcoming lithium mining venture have lost shine due to weak global commodity prices.

Looking ahead, the company remains confident about its retail business and, as my colleague Tristan highlighted, it expects lithium hydroxide production to commence in the first half of the 2025 calendar year.

PE multiples are high

Wesfarmers shares are currently trading at 26x FY25 earnings estimates. Historically, their PE multiples have ranged from 15x to 32x, making the current valuation relatively high.

Comparing Wesfarmers to its peers, based on earnings estimates provided by S&P Capital IQ:

  • Woolworths Group Ltd (ASX: WOW) shares are valued at 23x FY25's estimated earnings.
  • Coles Group Ltd (ASX: COL) shares are valued at 20x FY25's estimated earnings.

Given this context, it seems unlikely that Wesfarmers' PE multiple will increase significantly from its current level.

Can Wesfarmers shares outperform the ASX 200?

Over the last 10 years, the ASX 200 Index generated a total return of 7.6%, including a dividend yield of 4.7%.

As discussed, Wesfarmers shares have the potential to outperform the index if the company achieves the expected 10% EPS growth while maintaining a 26x PE multiple. However, the success of this largely depends on the progress of its lithium projects and the direction of global commodity prices in particular.

Despite this uncertainty, Wesfarmers remains one of the top dividend payers on the ASX, currently offering a fully franked dividend yield of 3%. While it's challenging to predict when lithium prices will rise, Wesfarmers shares can be a valuable addition for dividend-focused investors.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor Kate Lee has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Coles Group and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

share buyers, investors, happy investors
ETFs

How I would build a $100,000 portfolio with ASX ETFs today

You don't need more than three ETFs to build a diversified portfolio...

Read more »

iPhone with the logo and the word Google spelt multiple times in the background.
Opinions

I've been buying these 2 US stocks in 2025. Here's why

Sometimes the US markets are a better place to go shopping for stocks.

Read more »

A man and woman sit next to each other looking at each other and feeling excited and surprised after reading good news about their shares on a laptop.
Opinions

Where I'd invest in ASX shares after the RBA interest rate cut

These stocks look really attractive to me. Here’s why…

Read more »

Miner looking at a tablet.
Opinions

3 reasons why the Fortescue share price could still be a buy

Let’s dig into why this mining giant could be a solid buy.

Read more »

A young woman wearing a red and white striped t-shirt puts her hand to her chin and looks sideways as she wonders whether to buy NAB shares
Opinions

The pros and cons of buying Wesfarmers shares in May

Is this retail giant an appealing opportunity?

Read more »

Smiling man sits in front of a graph on computer while using his mobile phone.
Opinions

2 ASX 200 shares that I think are still bargains after the market rally

These businesses look like attractive opportunities. Here’s why…

Read more »

A young woman looks at something on her laptop, wondering what will come next.
Opinions

Worried about another stock market sell-off?

Market declines don’t need to be too scary.

Read more »

An evening shot of a busy Times Square in New York.
Opinions

The pros and cons of buying US-focused ASX ETFs in the current environment

In a short amount of time, the US share market has erased the declines that it went through at the…

Read more »