Wesfarmers Ltd tipped to slash dividends

Credit: Target

Shares in investment conglomerate and the operator of Coles supermarkets Wesfarmers Ltd (ASX: WES) have fallen around 3.8% in afternoon trade to $40.31 after the company announced problems at its Target superstore business yesterday.

The Australian Financial Review is also reporting that analysts at Morgan Stanley now expect the group could cut its full year dividend by around 10% as it invests to restructure its Target business.

Morgan Stanley also reportedly lowered their earnings per share forecast by 7% after the announcement that Target would require a $145 million investment and produce an earnings loss of $50 million this year due to lower margins and heavy discounting.

Wesfarmers shares are owned by many retail investors for their solid stream of fully franked dividends and any hint that dividends are set to fall will see some head for the exits. Many of those investors will also own shares in supermarket giant Woolworths Limited (ASX: WOW), which has been forced to slash its own dividend as profits fall in part because of the struggles of its own discount department store Big W.

Woolworths also recently decided to cut and run from its loss-making Masters Home Improvement business as it was unable to effectively compete with the dominant Bunnings business owned by Wesfarmers. Bunnings keeps delivering superb results for Wesfarmers, while its Coles supermarkets are also consistently growing same-store sales unlike the Woolworths supermarkets.

Wesfarmers also recently took a big gamble in agreeing to pay around $658 million for UK-based home improvement business Homebase, with the intention to rebrand it Bunnings and start turning profits in the UK market. I expect management’s margin-lifting expertise and supplier relationships will make for a successful venture in the UK and pay dividends for long-term investors. Today the shares sell for $40.23 and remain a solid opportunity for conservative investors.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

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