The Wesfarmers Ltd’s [ASX:WES] shares slipped today despite posting a net profit after tax of $2.4 billion, and flagging a return of surplus capital to shareholders.
While Wesfarmers Managing Director Rob Scott harboured concerns about the outlook for the economy if lockdowns affecting the majority of Australia persist, he nonetheless believes the company can thrive once trading restrictions ease.
WES shares are currently trading at $62.45 per share, down 2.4%.
Zooming out, the WES stock has gained 26% over the last 12 months, slightly outperforming the ASX 200.
Let’s look at some of the key results.
Wesfarmers FY21 highlights
Revenue jumped from $30.8 billion in FY20 to $33.9 billion in FY21, reflecting 10% growth.
Net profit after tax (NPAT) rose from $2.1 billion in FY20 to $2.4 billion in FY21, representing 16.2% growth.
EBIT also showed improvement rising to $3.7 billion in FY21, up from $3.2 billion in FY20.
Basic earnings per share — excluding significant items – climbed from 184.2 cents in FY20 to 214.1 cents in FY21.
That said, Wesfarmers did report a 25% drop in operating cash flows, totaling $3.4 billion.
The firm said strong earnings growth was offset by a ‘normalisation in working capital positions across the retail businesses.’
Further, the group’s gross capital expenditure of $896 million was up 3.3% on the prior year.
This was due to increased investment in data and digital initiatives across all Wesfarmers divisions.
Source: company presentation
WES managed to maintain ‘significant balance sheet flexibility’ during the year to complement its investment plans.
The company recorded a net cash position of $109 million at the end of the year.
Wesfarmers Managing Director Rob Scott said:
‘In line with Wesfarmers’ objective of delivering superior and sustainable long-term returns, the businesses continued to invest in providing greater value, quality and convenience for customers, including through strengthened data and digital capabilities.’
Wesfarmers to return surplus capital to shareholders
WES directors have decided to pay a fully franked final ordinary dividend of 90 cents per share, bringing the final fully franked dividend for the year to 178 cents per share.
But management didn’t want to stop there.
WES directors are recommending a return of capital to shareholders of $2.00 a share.
This would represent a capital distribution of about $2.3 billion.
The proposal is subject to shareholder approval at the 2021 Annual General Meeting (AGM) on 21 October.
Wesfarmers share price outlook
WES recorded a solid all-round performance in FY21, with shareholders likely pleased by Wesfarmers planning to return $2.3 billion.
The proposed capital return to shareholders is a signal the firm is confident in its long-term outlook.
You don’t hand out $2.3 billion anticipating times of stress.
WES Chief Financial Officer, Anthony Gianotti, explained the capital return this way:
‘The proposed return of capital is enabled by the strength of the Group’s balance sheet, its access to well-established funding sources and the resilient and cash-generative nature of its businesses, as well as the receipt of proceeds from the sale of assets in recent years.’
Looking out, analysts are currently forecasting a net profit of $2.32 billion in 2022.
These may come down given the challenging December-half outlook for Wesfarmers.
‘We may see modest consensus cuts but overall the result looks good and the capital return is a positive,’ commented Jarden analyst Ben Gilbert.
Wesfarmers plan to hand out surplus capital to shareholders highlights why many investors choose blue chips like WES as a potential way to supplant income from dividends and capital distributions.
But as Fat Tail’s resident gold guru Brian Chu would have it, blue chip stocks aren’t the only means to build up wealth.
Don’t forget gold.
In a recent presentation, Brian went through strategies to discover the ‘natural language’ of gold mining stocks to swing for potentially large returns, as we move into what Brian argues is a long-anticipated gold bull market.
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