Wesfarmers stuns on growth and dividend

The first rule of retailing is to keep the customer satisfied. Richard Goyder has extended that principle to shareholders, handing out cash rewards that he clearly hopes will maintain the momentum in Wesfarmers (WES) top heavy share price.

A 50c a share capital return and a sharply lifted final dividend had an immediate effect, attracting a swarm of yield hungry investors as shares in the diversified retail, resources and financial services group leapt out of the blocks.

Net earnings rose 6.3% to $2.26 billion, slightly better than expected. But with operating cash flows up 8% and free cash flow surging 47.5%, Goyder seized the opportunity to spread the love.

Some analysts were hoping for a final dividend of 97c. Instead the company splashed $1.03, a 9% lift on last year that took the full year payout to $1.80. And just for good measure, a capital return to boot.

Wesfarmers these days is pretty much a retail operation with a few bits and pieces tacked on. Coles contributes half the group earnings before interest, tax, depreciation and amortisation with Bunnings around a quarter.

Both those divisions continued to excel with Coles earnings up 13.1% and Bunnings lifting 7.5% while Kmart, once a basket case, saw its earning leap 28.4%.

Target, however, remains a problem with the turnaround taking longer than anticipated. Earnings at the discount retailer plunged 44% as the inventory clearance continued to weigh on income (see Cliona O'Dowd's Collected Wisdom).

Among the bits and pieces, insurance saw a remarkable turnaround. Last year’s $5 million contribution swelled to $205 million as it benefitted from a downturn in catastrophe claims.

Resources earnings, however, slid 66.3% as weaker coal prices hit producers across the globe.

Wesfarmers horribly expensive 2007 purchase of Coles just before the market tanked and the subsequent heavily dilutive capital raising has begun to pay off for shareholders as the retailer steals back market share for Woolworths.

When you start off so far behind, early gains are easy. Maintaining that growth becomes increasingly difficult as the two giants move closer to equilibrium.

Deflation in food prices – partly as a direct impact from the intense competition between Coles and Woolies – hasn’t helped either.

Wesfarmers has attracted a premium in the past 18 months because of its unique combination of yield, its defensive nature and its growth.

Priced at 17 times earnings, many sceptics anticipated this result would mark the beginning of the end of the love affair with the Perth based conglomerate. They were happily disappointed.