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Woolworths Limited and Wesfarmers Ltd dividends set to rise

As we approach the February reporting season which for the majority of companies means half-yearly reporting, analysts and investors will soon get the opportunity to review and potentially adjust their expectations for the 12 months to June 2014.

As it currently stands, based on consensus forecasts (according to Morningstar), analysts are tipping Australia’s two leading supermarket retailers to boost earnings and dividends this year.

Woolworths Limited  (ASX: WOW) earned 190.2 cents per share (cps) in financial year (FY) 2013 and paid out dividends to the value of 133 cps, consensus forecasts are for earnings per share (EPS) to rise to 196 cps and dividends to rise to 140 cps in FY 2014. This would represent a pay-out ratio of 71%, up from 70%.

Meanwhile Wesfarmers Ltd (ASX: WES) earned 195.6 cents per share in FY 2013 and paid dividends of 180 cps. For FY 2014 consensus forecasts are for EPS to increase to 215.3 cps and full-year dividends to rise to 200 cps. This would represent an increase in the pay-out ratio from 92% to 93%.

The implied growth rates of EPS from these forecasts are 3% and 10% for Woolworths and Wesfarmers respectively. Likewise the growth rate of dividends is 5% and 11% respectively. If the forecasts are ultimately accurate then the growth rates are impressive given both businesses are large and mature.

The near-term outlook for these two blue chip companies is in stark contrast to that expected at competitor Metcash Limited (ASX: MTS). After earning 30.9 cps and paying dividends of 28 cps in FY 2013, the third force in the supermarket sector is forecast to report a decline in EPS to 30.3 cps and be forced to cut its dividend to 19.8 cps.

Foolish takeaway

Ultimately what matters is the long-term growth potential of these companies. Woolworths’ dominant supermarket retailing position is indeed appealing, however the conglomerate structure of Wesfarmers makes the growth options available to the company even more appealing. The big two still look good investments.

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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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