Wesfarmers Ltd (ASX: WES) stock has an impressive track record of returns in the short term and long term. In the last 12 months alone, the company has risen more than 45%. That compares to a rise of around 9% for the S&P/ASX 200 Index (ASX: XJO). Can the ASX retail share continue this strong run?
As the owner of Bunnings and Kmart, Wesfarmers has benefited from the shift of some households looking for value. The large scale means those businesses are able to offer customers better prices than many of their competitors.
Past performance is not a reliable indicator of future performance, of course, so it will be interesting to see what happens next with shareholder returns. One broker has some thoughts on what the next year may look like for Wesfarmers stock.
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Growth options
Less than three months ago, Wesfarmers gave a strategy presentation regarding its various divisions, including Bunnings, Kmart Group, Officeworks, healthcare, WesCEF (chemicals, energy and fertilisers) and so on.
Even though the Australian consumer is facing economic challenges, according to UBS, the company's main divisions still have "attractive" growth options.
With Bunnings, there are new and expanded product ranges, including pet, rural, and auto. The broker also pointed to "improving use of retail space, improved omni-channel customer experience, improve[d] commercial offer, supply chain improve[ments]". There are also external tailwinds, including population growth, the age of houses, and the limited supply of housing.
Turning to Kmart, this business is able to leverage the growth in customer numbers as they "seek value through greater frequency and category participation". Kmart's own brand, called Anko, can benefit from its scale, enabling better products at lower prices while also broadening existing product ranges to win over more customers. The Anko international wholesale initiative also provides "long-term optionality".
Officeworks can benefit from the extended range and the retailer entering new categories.
UBS' views on Wesfarmers stock
A few months ago, UBS increased its price target on Wesfarmers stock from $61 to $66 because of the stronger long-term growth outlook. However, even this elevated price target implies the Wesfarmers stock price could drop 9% over the next 12 months from today's level. Of course, UBS could boost its price target, or the broker could be wrong. Time will tell.
The broker projects that Wesfarmers could make $2.77 billion in net profit after tax (NPAT) in FY25, up 8% from FY24. That means the business is valued at just under 30x FY25's estimated earnings.
UBS also suggests the business could increase its dividend per share by around 8% in FY25 to $2.16. That's a possible grossed-up dividend yield of approximately 4.25%.
The broker also pointed out that Wesfarmers' "strong" balance sheet can enable it to 'realise' its growth opportunities.
