Wesfarmers shows it’s better off without Coles, rewards shareholders with special dividend

Wesfarmers ASX WES Coles COL Bunnings profit dividend 2019
The spinout of Coles and sale of other non-core assets saw Wesfarmers post a first-half profit of $4.5 billion.

Wesfarmers (ASX: WES) is looking like a new and much more exciting company after it slimmed down and divested itself of Coles (ASX: COL).

It is not just the special dividend of $1 a share that accompanied a regular dividend of the same amount that is causing Wesfarmers shares to zoom upwards, it is the renewed confidence of the executive team as it returns to its entrepreneurial roots and begins to hunt around for opportunities.

That confidence showed when Wesfarmers chief executive officer Rob Scott warned that Labor’s plan to end cash refunds for excess franking credits and other changes to taxation policies could dent household budgets and damage fragile consumer spending.

“At a time when consumers are under a bit of pressure and cost of living is increasing and real wage growth has been relatively modest, concerns around housing and access to credit, I think now is the time that when setting policies we should be mindful of the impact it can have on consumers and the impact it will have on business investment,” Mr Scott said after announcing the Wesfarmers results.

Better profit and bigger dividends

Nervous consumers might be under pressure but the same can’t be said of Wesfarmers, which announced a better than expected interim profit along with its turbocharged dividends.

Even after the excess capital from the Coles sale is paid to shareholders, the Wesfarmers balance sheet remains rock solid and capable of some meaningful takeovers should the company find suitable value enhancing targets.

Plus, its dividend overloaded shareholder base would no doubt be happy to “return the favour’’ and take part in any capital raisings that were required for worthwhile takeover activities.

While reading through the Wesfarmers results is made more difficult because it sold a few businesses in the past year, its remaining business units are mostly travelling nicely.

Revenue from continuing operations was up 4.2% at $14,388 million and pre-tax earnings rose 8.6% to $1,911 million.

Net profit after tax from continuing operations and excluding significant items was $1,080 million, up 10.4%.

Bunnings still the hero

As expected, Bunnings remains the hero for Wesfarmers with a 5.2% rise in revenue to $6,909 million and a 7.9% lift in earnings to $932 million.

That result came despite weaker consumer conditions thanks to tough cost control and favourable commercial property market conditions.

Kmart and Target were not as healthy with revenue up 0.8% but earnings down 3.8% to $383 million but Officeworks looks to be in a better place.

Officeworks grew revenue by 8.2% to $1,100 million with earnings even stronger, up 11.8% to $76 million and the industrials business had a small decline in half year earnings to $227 million.

Coles has some big problems

It was a much less pretty result over at the newly independent Coles, which was acting as a capital hog while it was owned by Wesfarmers.

While Coles also has a strong balance sheet and massive cash flows, its group profit weakened in the six months to December by 5.8%.

Part of that was due to the costs of operating as a standalone business, the after effects of the highly successful Little Shop marketing campaign and a terrible result by its fuel and convenience store segment.

However, the NSW stores also put in a terrible performance and given that is the largest state in Australia and many stores will need to be modernised, that is a big and expensive problem for Coles.

The convenience stores are also a significant issue, one that has been addressed by a big restructure bringing in Viva Energy which should help to reduce petrol prices a bit at Shell/Coles outlets and help to drive some more traffic through the convenience stores.

Even the good news has a gloomy side for Coles’ new chief Steven Cain, with the ongoing improvements in online sales coming with a cost of lower margins.

With the cost of doing business now rising faster than sales, Mr Cain will need to walk a tightrope between supporting growth options while trying to increase margins and turn around all of the problem areas such as the petrol stations, the NSW stores and liquor.

The share market has already made its decision about which business has the better prospects in the short term with Wesfarmers shares on the rise and Coles falling away a little.

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.