What Wesfarmers’ results mean for shareholders

Diversified conglomerate Wesfarmers (ASX: WES) has today released a reasonable set of full-year results. Operating revenue was up 3% to $59.8 billion with earnings before interest and tax (EBIT) also rising 3.1% to $3.658 billion. Thanks to substantially lower finance costs, which were down 14.5% from $505 million to $432 million, net profit after tax increased a healthy 6.3% to $2.261 billion.

The board declared a fully-franked final dividend of $1.93, taking the full-year divided to $1.80 which is a 9.1% increase on last year. The board also announced a 50 cent capital return, which will be music to the ears of shareholders. Strong cash flows and a strong balance sheet were cited by the company as enabled the capital return which all tallied will amount to a return of approximately $579 million to shareholders.

Turning to the divisional results, the star performers were Coles and Kmart, which both recorded double-digit improvements in EBIT. Unsurprisingly the Resources division was a dampener with the exposure to lower coal prices causing a 66.3% fall in divisional EBIT. No doubt falls of this magnitude will be a common experience affecting other coal miners including Whitehaven Coal (ASX: WHC) and fellow conglomerate Washington H. Soul Pattinson (ASX: SOL) as well. Also putting in a poor performance was Target where EBIT plunged 44% from $244 million to $136 million.

Management stated that challenging conditions are expected for the Retailing divisions throughout the first half of 2014, that low interest rates and costs are expected to constrain the Insurance division, and that higher coal volumes and a lower Australian dollar should balance the lower coal prices. However management was coy on providing financial details around the outlook.

Foolish takeaway

With earnings per share of $1.956 reported for the 2013 year and a muted outlook statement, Wesfarmers shares would appear to have limited upside from $41.50 which puts the stock on a price-to-earnings ratio of 21.2. Although Wesfarmers has high quality assets, its return on shareholder funds is still sub-par at just 8.9% and with a full looking valuation there would appear to be better value elsewhere.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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