What: Wesfarmers Ltd (ASX: WES) shares have rallied nearly 3% by early afternoon today despite a decline in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). This thanks to the diversified conglomerate reporting a solid full year result and announcing a proposed capital return of $1 per share to shareholders.
So what: Assuming the proposal is approved, Wesfarmers will return around $1.1 billion in excess capital to shareholders. It's not a complete surprise that the leading blue-chip has undertaken this initiative given the multiple asset sales which have occurred over the past year, bolstering the firm's cash reserves.
Adding to the positive sentiment of the capital return proposal has been strong underlying results which saw revenues increase by 4.2%, profits increase by 6.1%, earnings per share increase by 6.8% to 209 cents, full year ordinary dividends up 5.6% to 190 cents per share and return on equity increase 0.5% to 9.4%.
Now what: Turning to the outlook for Wesfarmers, management has commented that it expects the retail divisions to grow via continued improvement to services, increased operational productivity and supply chain efficiency. The company also expects to make progress in the transformation plan at Target. Meanwhile the Industrial divisions retain good market positions which management believes continue to support the long-term outlook for these businesses.
As good as it gets?
With Wesfarmers' shares rallying to a new 52-week high of $45.09 on Wednesday the stock is trading on a price-to-earnings multiple of 21.6. Many investors continue to have a tunnel vision focus on yield and the $1 capital return is likely to spark further demand for Wesfarmers from income-seeking investors. Investors should be careful however not to place paramount importance on income without considering the potential for capital losses.