Wesfarmers: A High-Yield Alternative To Wal-Mart

|
 |  About: Wesfarmers Ltd. (WFAFF), Includes: WMT
by: Dividend Ranch

The retailing business is an essential part of a modern economy. A majority of a nation's GDP consists of household consumption and retailers are there to capture this money flow. People may cut back on buying cars or fancy electronic gadgets, but general food, detergents and personal hygiene items are as essential today as ever.

If you are dismayed by the low yield of Wal-Mart (NYSE:WMT) which stands at only 2.29%, there is a retailer down under which yields 5.1%. It is Wesfarmers (OTCPK:WFAFF). Here is a link to a comprehensive quote for the stock as Seekingalpha.com doesn't have it for this Australian stock.

The .PK behind a stock simply means the stock in question is traded on the pink sheets (or the Pink Sheets Electronic Quotation service). The pink sheets service is a loosely regulated over-the-counter, decentralized market. There are few requirements to being listed on this network, as companies do not have to file with the SEC nor keep updated financial information. The only major requirement to being listed is to have at least one market maker, who must be registered with the SEC and a member of the NASD. The market maker is responsible for quoting the latest trading price of the stock on the pink sheets network. As Australian stocks are generally not listed in the US, and the volume for this stock on the pink sheets is low, it is better to buy it in Australia, where Wesfarmers is one of the most liquid stocks.

Wesfarmers Limited is one of Australia's largest public companies and one of Australia's largest retailers. Its headquarters are in Perth, Western Australia. Wesfarmers has been in business since 1914. It has a history of almost a hundred years. It is basically a conglomerate and has been called the Australian Berkshire Hathaway.

However, the most important moment in Wesfarmers' long history came in 2007 when the company acquired Coles (the second largest Australian supermarket chain) for 22 billion Australian dollars. This was deemed too high, as the article above claims. But it is easy to be a general after the battle. Richard Goyder, Wesfarmers' CEO, couldn't have known of the market crashes that ensued after he bought Coles.

The main competitor of Coles is Woolworths Ltd, a retailer that has been in operation since the 1920s. Below are their market shares.

Click to enlarge

Source: Retail Food Sector Report - 2012.

Wesfarmers owns a wide variety of businesses. I have compiled a table with its main segments (source: Wesfarmers 2011 Annual Report Financial Statements pages 110-111) denoting the cash flow from each.

WESFARMERS LTD. SEGMENTS

Data in millions of AUD

REVENUE

EBITDA + DEPRECIATION AND AMORTIZATION

CAPITAL EXPENDITURE

OPERATING FREE CASH FLOW

COLES

32,073

1,968

840

1,128

HOME IMPROVEMENT AND OFFICE SUPPLIES

8,251

1,126

613

513

RESOURCES

1,778

607

372

235

INSURANCE

1,739

74

47

27

KMART

4,036

332

101

231

TARGET

3,782

416

95

321

INDUSTRIAL AND SAFETY

1,557

218

32

186

CHEMICALS, ENERGY AND FERTILIZERS

1,641

475

63

412

OTHER

18

-138

7

-145

TOTAL

54,875

5,078

2170

2,908

FINANCE COSTS

-526

TAXES

-784

DIVIDENDS PAID

1,557

Click to enlarge

Wesfarmers' free cash flow is identical to the company's dividends. This is unusual compared to American firms. For example, Wal-Mart spends only about 50% of its cash flow on dividends. Richard Goyder, Wesfarmers' CEO has stated that the company is committed to maintaining and growing its dividend as investors cannot expect much return from capital appreciation in this economic environment.

Wesfarmers owns Coles, Australia's close second supermarket chain. With the Australian economy expected to grow at 3.3%, better than most developed countries, I think it's safe to invest in this retail giant. Relatively low share price is the result of the stress the company has undergone buying Coles. If the current positive trends in Wesfarmers retail operations continue, you can look forward to a nice capital appreciation as well. Wesfarmers grew its earnings 19% in 2011. We shall find out about the company's 2012 full year earnings on August 18 2012. This company's financial year ends on June 30.

Disclosure: I am long OTCPK:WFAFF.