Is Wesfarmers a ‘safe’ ASX 200 share to buy for dividends?

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A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.

© Provided by The Motley Fool
A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.

As an ASX 200 blue chip, many ASX dividend investors own Wesfarmers Ltd (ASX: WES) shares for income. Over the past few years, this would have proven rather successful.  

After a big hit to its shareholder payouts in 2020 (thanks to the pandemic), Wesfarmers has been steadily bringing back its dividends since. In 2021, the company doled out payments worth $1.78 per share, up from $1.70 in 2020. And last year, the company upped them to $1.80 per share.

But is Wesfarmers really a safe ASX share to buy for income?

What makes an ASX 200 share ‘safe’?

Well, let’s clear this up right away. No ASX share is truly ‘safe’ from an income perspective. Regardless of its history, no company is under any sort of obligation to pay out dividends. And if a company doesn’t have enough cash to comfortably afford a dividend, paying out one could even inflict long-term damage.

Saying that, we usually find that top-quality companies can consistently afford to pay out rising dividends to investors over time. So is Wesfarmers one of those gems?

Well, it certainly has been. Wesfarmers has paid out fairly consistent dividends for decades. Despite the ravages of the pandemic, the company still forked out a decent, if trimmed dividend in 2020.

Wesfarmers is a company with fingers in many pies. It owns the dominant retailers Kmart, OfficeWorks and Bunnings, as well as dozens of other businesses outside the retail sector. These include mines, clothing, chemicals and fertilisers, amongst others.

However, Bunnings is still Wesfarmers’ primary breadwinner, contributing more than 60% of the company’s total earnings before tax in FY2022.   

Although its many businesses give the company a somewhat diversified earnings base from which to draw dividends, the lion’s share still comes from Bunnings alone. If Bunnings’ profits hit the skids, it’s likely that Wesfarmers’ dividends would too.

Are Wesfarmers’ dividends maxed out?

Additionally, Wesfarmers’ finances are starting to look a little stretched by its current dividend policy. The company reported a total of $2.08 in earnings per share (EPS) over FY2022. Of that $2.08, the company paid out $1.80 in dividends per share, which is a payout ratio of 86.54%.

That doesn’t leave a lot of wiggle room to keep its dividends at the current levels if the company does experience a future drop in earnings.

So all in all, Wesfarmers can be described as a solid dividend payer on the ASX 200 today. However, I would not describe it as safe, or even approaching safe. If we see a recession this year, there’s a real chance Wesfarmers could be forced to trim its dividends.

But that doesn’t mean Wesfarmers is a bad investment. Many companies cut back on dividends when their profits go through a downturn, which is arguably the prudent thing to do. And Wesfarmers has delivered some pretty impressive returns over its long history as an ASX share:

If you want truly safe income, a savings account or term deposit is the right place to look, not the share market.

At the current Wesfarmers share price, this ASX 200 blue chip has a trailing dividend yield of 3.69%.

The post Is Wesfarmers a ‘safe’ ASX 200 share to buy for dividends? appeared first on The Motley Fool Australia.

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