Brokers

Why Wesfarmers shares are a buy in this broker’s books

The Wesfarmers Ltd (ASX: WES) share price has dropped by around a quarter since the start of 2022.

It has been a rough time for many ASX retail shares and growth shares since the start of the year, amid inflation and rising interest rates.

Wesfarmers is one of the oldest businesses in Australia. It operates several businesses, including Officeworks, Target, Catch, Kmart, Bunnings, Priceline, Soul Pattinson Chemists, Clear Skincare Clinics and some industrial businesses.

Which broker likes Wesfarmers?

Broker Morgans thinks Wesfarmers is a leading business in the retail space and worth owning, which is why it has an ‘add’ rating on the business with a price target of $58.40. That implies a possible upside of more than 25%.

In other words, Morgans thinks Wesfarmers shares can regain most of its lost ground over the next 12 months.

As mentioned by my colleague James Mickleboro, Morgans said that Wesfarmers had one of the highest-quality retail portfolios in Australia, with a good management team and key business, Bunnings, continuing to perform well. Therefore, the fall in the Wesfarmers share price could be an opportune time to buy shares.

Dividend and valuation

Wesfarmers has committed to producing shareholder returns. Part of that is by paying an attractive dividend to investors.

Morgans expects the company to pay an annual dividend per share of $1.65 in FY22. That translates into a grossed-up dividend yield of 5.1%.

Morgans has also pencilled in dividend growth of around 10% in FY23 to an annual dividend per share of $1.81. This puts the forward grossed-up dividend yield at 5.6%.

In line with a ‘buy’ rating, Morgans expects Wesfarmers will generate more net profit after tax (NPAT) than other brokers.

The broker’s earnings estimates put the Wesfarmers share price at 23x FY22’s estimated earnings and 21x FY23’s estimated earnings.

Why are investors turning negative on the Wesfarmers share price?

As one of the largest retailers in Australia, Wesfarmers is heavily exposed to the Aussie consumer. Rising interest rates and higher inflation could hurt household budgets and limit their spending at Bunnings, Catch and its other retail brands.

That’s partly why brokers like Macquarie, Ord Minnett and Citi all have negative ratings and price targets at least 5% lower than where the business is currently performing.

Snapshot

Despite the fall since the start of the year, the Wesfarmers share price has lifted by around 10% over the past month.

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