The Wesfarmers Ltd (ASX: WES) share price has been one of the most impressive performers of the last year, climbing 33%.
One of the most important phrases in the financial world is that past performance is not a reliable indicator of future performance. It may be silly to think the Wesfarmers share price will rise another 33% in the next 12 months.
The company’s increased valuation has largely come about from a rise in the price/earnings ratio (p/e ratio). In other words, the market is willing to pay a higher multiple for each dollar of net profit than it was a year ago.
It’s unsustainable for a company’s p/e ratio to continue rising forever, but I’m optimistic the company can continue delivering for investors over the long-term for a few reasons.
Great businesses
Wesfarmers owns some of the most impressive retail businesses, in my opinion. I’m particularly looking at Bunnings and Kmart as two of the best companies in Australia. Their ability to provide a wide range of products at a low price is very attractive for customers in this era of high costs.
It’s the high quality of those businesses that have allowed Wesfarmers to achieve a return on equity (ROE) of 34.3% in FY25, or 31.2% excluding significant, one-off items.
If Wesfarmers can continue generating a return of more than 30% on money invested in the business then I’d suggest the company should continue investing as much as it can for the benefit of shareholders.
Industry diversification
While Wesfarmers may be best known as a retailer, I like the efforts by management to diversify the business to expand into other sectors such as lithium and healthcare.
The company is also growing its Anko brand into other countries such as the Philippines which gives the business a much longer growth avenue.
There’s no guarantee that the banking sector, retail sector or any industry will be as profitable as it is now in the future. Having the ability to diversify the operations is an excellent characteristic for long-term flexibility and gives me confidence of success for the Wesfarmers share price.
This allows Wesfarmers to try to find the best opportunities across a range of industries.
Good dividend record
I like how the leadership team are paying close attention to producing returns for investors.
Wesfarmers pays a good portion of its profit out as a dividend, allowing investors to benefit from the cashflow it’s generating each year.
The company is balancing investing and ensuring rewards for shareholders.
FY25 saw Wesfarmers increase the full-year dividend by 4% to $2.08 and also announce a proposed capital distribution of $1.50 per share.
I believe Wesfarmers will continue balancing long-term growth with regular dividend payments.
