Wesfarmers puts runs on board

READING one financial newspaper report over his breakfast eggs the other morning Wesfarmers chief Michael Chaney might have been bemused to see that his share price had dropped 35c in reaction to the $201 million record profits.

This was an error. The stock was up 23c at $12.85, and it has kept on going through $13.40.

That gives Wesfarmers a market value of around $3.5 billion, promoting it to number 42 on the list of Australia’s biggest companies, just above Santos, and a notch below soon-to-vanish North. But the most pleasing news was the 16.6 per cent return on shareholders funds, putting the company firmly back among the top performers in the country by that yardstick.

Wesfarmers shares have been under pressure for most of the year following an uncharacteristic growth stumble. The stock market does not like conglomerates. It says it does not understand them.

Chaney has been able to point to the scoreboard once again on the virtues of diversification. The chemicals and fertilisers arm has been a laggard in 2000, but that was overshadowed by a surprisingly sharp boost in the rural division.

Merchandise sales soared. And there has been a welcome improvement in wool and cattle prices. The Bunnings hardware stores juggernaut continues to roll on providing the main driving force.

Investors had also become impatient over Wesfarmers rigid minimum rates of return requirements on capital expenditure that have seen it pass up many opportunities.

One anti-conglomerate argument is that the group would be more valuable to shareholders on a breakup. Certainly, the sum of the parts would fetch more than the whole. We may see some restructuring, and resolution of the stoush with Alan Newman at Futuris over IAMA could be a catalyst.

But the year may come when all the group divisions fire at once. Since the policy is to pay out 100 per cent of after tax earnings in dividends, that would provide a bonanza – not least for Franked Income Fund, whose sole asset is half of Wesfarmers.

Franked Income shares were knocked down to $3.55 earlier this year – a monster discount to the prevailing Wesfarmers price – because the ASX could not find room for the investment company in its confusing suite of new indices.

As we know, fund managers would not buy the crown jewels at a discount unless they were in an index somewhere. They now have the opportunity to purchase Franked Income at $4.35.