Hard to find fault with Wesfarmers’ performance

Western Australia’s most successful company, Wesfarmers, has an outstanding track record of delivering impressive returns to shareholders.

The company says its “total shareholder return” over the past two decades has averaged 30 per cent per annum making it one of the top performing companies in Australia.

This measure encompasses three main contributions.

First is the growth in the company’s share price. In Wesfarmers’ case, like almost any company, the share price does not always travel north, but in most years it has improved.

Currently its shares are trading around $40, not far off the all-time high recorded earlier this year of $42.45.

Second are the company’s dividend payments.

Wesfarmers has made two dividend payments over the past 12 months.

It paid 92 cents per share in August, being the “final” dividend from 2003-04, and it paid 53 cents in February, being the interim dividend this financial year.

Early this month the company declared a final dividend of $1.27 for the 2004-05 financial year, payable later this month.

Wesfarmers pays Australian company tax on its profits and therefore it is able to pay fully franked dividends, which boosts the after-tax return to its shareholders.

The third contributor to Wesfarmers’ total shareholder return is its capital returns, which are even more tax effective.

The latest capital return, paid in March, was of $1.00 per fully paid ordinary share.

Former managing director Michael Chaney said the capital return was made possible by the company’s strong cash flow and low level of debt.

By returning some of its capital to shareholders, Wesfarmers was able to maintain its debt-to-equity ratio within its target range of 50 to 75 per cent.

The March capital return followed a similar $2.50 per share capital return in December 2003.

Capital returns are particularly appealing for shareholders, since Australian Taxation Office rulings allow a reduction in the cost base for the purposes of calculating capital gains tax.

For most Wesfarmers shareholders, that meant the capital return would not give rise to assessable income (although they would be subject to capital gains tax when they eventually sold the shares).

Putting the three contributors together, Wesfarmers delivered a very impressive total shareholder return of 44 per cent last financial year, with a large portion being tax free.

Not many investments can beat that.