Wesfarmers: Pressure to return to shareholders

Analysts estimate the company has $2.4 to $3.6 billion in excess capital.

Wesfarmers (ASX: WES) has become the latest blue chip to feel increasing pressure to ramp up returns to shareholders, with analysts making estimates as to how much excess capital the company could actually be holding.

Although the company has today issued a profit warning on its Target division, strong growth in other sectors including Coles – which drives over half of the company’s overall revenue – and Kmart have generated increasingly large pools of cash for the conglomerate, on the back of strengthening inventory turnover. Should the company continue to reduce average inventory days, even higher revenues are expected.

David Errington, a research analyst for Bank of America Merrill Lynch, has estimated that even after Wesfarmers’ forecast $2 per share dividend next year, the company’s balance sheet will show between $2.4 and $3.6 billion in excess capital. This amount could potentially be put towards increasing the company’s payout even higher over the next 2-3 years.

The Australian quoted Errington as saying: “We forecast a sizeable step-up in dividends… and we expect the company to return a sizeable portion of equity… over and above our forecast dividend payments over the coming two to three years.”

Supporting this theory, whilst “capital management” is usually the last item on the agenda for the conglomerate’s annual strategy briefing, it has become the first item for discussion for this year’s briefing on May 29.

As such, Errington has lifted his price target from $45 to $53 – almost 24% above where it is currently priced. Shares in Wesfarmers have today lost 3.5% in value at time of writing due to the profit warning on Target, reversing any gains made yesterday.

Foolish takeaway

With interest rates at an all-time low, a growing trend for investors has been to buy into high yielding stocks. This has prompted corporations such as Westpac (ASX: WBC), ANZ (ASX: ANZ) and Woodside Petroleum (ASX: WPL) to all increase their returns to investors, whilst Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) have made suggestions that they will do the same.

Although Wesfarmers could also put the money towards further acquisitions, a decision to distribute it to shareholders would likely see further increases in the share price.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

The share price of ASX infant products retailer Baby Bunting Group Ltd (ASX:BBN) has been a solid performer so far …

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

A new landmark report by the Intergovernmental Panel on Climate Change (IPCC) was released earlier this week. It provided a …

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest …

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos Limited (ASX: AMS) share price has been on a tear this past week, rising 15% on the back …

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

Online furniture retailer Temple & Webster Group Ltd (ASX: TPW) had a breakout year in 2020, moving from relative obscurity …

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

Shares in ASX healthcare company Polynovo Limited (ASX: PNV) almost doubled in price last year. And, despite a shaky start …

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

Investing in other geographic markets has become a popular way to diversify a portfolio. The risks associated with being exposed …

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

Despite the News Corporation (ASX: NWS) share price getting a 31% bump between November last year and today, News Corp …

Read more »