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Is Wesfarmers changing strategy?

Wesfarmers (ASX: WES) appears to be streamlining its business with the announcement that it has reached an agreement to sell its 40% share of industrial gas producer and supplier ALWA to joint venture partner Air Liquide. The joint venture has been in existence since 1965 when Air Liquide and Wesfarmers formed ALWA to service the Western Australian market with industrial and medical gases, gas equipment and welding products.

The gas business is part of the wider Chemicals, Energy and Fertilisers division which made $165 million in earnings before interest and tax (EBIT) during the 2013 financial year; while the sale is expected to result in Wesfarmers booking a pre-tax profit of $95 million.

News of the sale of ALWA comes after weeks of speculation ended that Wesfarmers would offload its Insurance division which is considered sub-scale despite earning $205 million in EBIT in financial year 2013. The speculation was put to rest with Wesfarmers announcing that it has reached agreement with Insurance Australia Group (ASX: IAG) to sell its insurance underwriting business for $1.845 billion.

The asset sales will be a significant boost to Wesfarmers’ cash balance with attention now turning to what capital management initiatives the company may undertake. With organic growth difficult to achieve for many companies in the current economic environment, capital management will increasingly be in focus. The recent sale by Thinksmart (ASX: TSM) of its Australian business to Flexigroup (ASX: FXL) and the subsequent announcement of an 11 cent special dividend and capital return and on-market share buyback another example of this strategy in action.

Foolish takeaway

While investing in companies which can reinvest and compound shareholder funds at attractive rates of return is highly desirable, when this can’t be achieved it is best if funds are returned to shareholders rather than being retained by management. Identifying companies which are maximising returns to shareholders via fully franked dividends, capital returns and share buy backs at attractive prices can be a profitable space for investors to search for investment opportunities.

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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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