17/08/2004 - 22:00

Single measure of success

17/08/2004 - 22:00

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Single measure of success

Total Shareholder Return analysis provides high-level insight into company performance. It condenses all forms of returns to shareholders to a single measure. 

Further analysis is always required to gain even a basic understanding of individual company performance.

The table (right) illustrates the five-year performance of WA Newspapers and Wesfarmers. Other than being large blue chip companies based in Perth, their operations do not overlap. 

WA Newspapers’ earnings derive largely from the publication of a monopoly daily newspaper in a mature market, while Wesfarmers operates a diverse portfolio of industrial and other businesses.

Five-year TSR in Wesfarmers was an extraordinary 25.8 per cent, an exceptional result for a company of its size. WA Newspapers achieved a more moderate 12.3 per cent. The primary difference between the two companies was the underlying capital growth on a notional $100 investment – $20.78 for WA Newpapers against $116.18 for Wesfarmers.

Capital growth largely reflects changes in the nature and value of the underlying businesses. Despite examining a significant number of potential acquisitions, WA News-papers has been unable to make major acquisitions at a sufficiently attractive price to achieve any significant non-organic growth. 

In these circumstances, management focus is typically on cost control and capital structure to drive maximum earnings from the existing business.  WA Newspapers has maintained a high dividend payout and gearing levels over the period. Dividend payments of $29.13 on the notional investment represented about one third of the incremental $78.49 change in wealth.

In contrast, Wesfarmers has been able to achieve higher rates of both organic and non-organic growth. The major acquisition over the period was Howard Smith, funded through a combination of debt and additional equity. 

When coupled with high rates of growth in DIY expenditure through house price appreciation, low interest rates and increasing willingness to borrow against home equity, the Bunnings hardware business has proved to be an earnings powerhouse for the company.  Wesfarmers’ cash flow has allowed it to fund growth largely from internally generated cash flow, even facilitated capital returns to shareholders.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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