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Will Wesfarmers return cash to shareholders?

Wesfarmers (ASX: WES) shareholders might be rubbing their hands together with glee, after the company announced the sale of is insurance underwriting business for $1.85 billion.

The company could return some of that cash to shareholders, or pay a special dividend, with Wesfarmers reporting that it will record a pre-tax profit of between $700-$750 million from the sale, which will be included in its second-half results in 2014.

Analysts have suggested shareholders could receive between 50 and 70 cents per share, either as a capital return, or a special dividend. Wesfarmers has already paid shareholders 50 cents as a capital return in August this year thanks to strong cash flows. The company had $5.8 billion in debt at the end of June 2013, up slightly from $5.5 billion the previous year, but is unlikely to use the proceeds of the sale to reduce its debt levels.

With revenues of $60 billion in 2013, and free cash flow of more than $2.1 billion, Wesfarmers can certainly handle the amount of debt it holds on its books. The Coles supermarket, petrol and liquor retail division continues to grow earnings, up 13% in 2013, while the Bunnings hardware division saw earnings rise 7.5%, as the company rolls out new stores and grows same store sales.

The only blots on Wesfarmers’ copybook are the performance of the resources division, which has been hit by falling coal prices, and Target, its discretionary retailer. Target is struggling thanks to strong competition from the likes of Woolworths’ (ASX: WOW) Big-W, its own K-Mart stores as well as department store retailers David Jones (ASX: DJS) and Myer Holdings (ASX: MYR).

Wesfarmers appears to have received a rich price for the underwriting business at 19 times earnings. The buyer, Insurance Australia Group (ASX: IAG), obviously sees that the purchase can bring a lot of value to its existing insurance business, while some commentators have suggested the purchase eliminates one of its competitors.

Foolish takeaway

Wesfarmers was criticised for its $20 billion acquisition of Coles just before the global financial crisis, but that is now paying dividends. Shareholders will likely be hoping to see another return of capital late next year.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

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