Wesfarmers Ltd - Business Segments, Corporate Governance, Remuneration Policy, And Financial Performance Essay.

Retail Segment

Wesfarmers Ltd is a multinational company which owns a diversified portfolio of business including hardware, department stores, processing and energy distribution. The company also produces chemicals, fertilizer and industrial and safety product industries (Wesfarmer.com, 2022). The company operates under two segments which are retail and industrials. The following section represents the business segments of the company in detail:

Retail – This segment of the company operates in a range of services which starts from department stores to office supplies. The company has home grown brands which it caters to the market. The Bunnings is a retailer primarily focusing on outdoor living products and is one of the most significant suppliers to a variety of customers like builders, tradesmen and housing industry and has a chain of stores located at 378 places (Bloomberg/WEX, 2022).

Industrials – This segment includes businesses like chemicals, energy and fertilizers which the is involved in supplying to the industrial and mining sectors. The company is also involved in distributing LPG, appliances of customers belonging to domestic, commercial and industrial sectors.

Industrial safety – The company is involved in providing maintenance, operating and packaging services, safety products and repair services under this segment. The unit that operates under this segment is Blackwood’s which is a supplier of industrial products in various parts of the globe including Australia, New Zealand and Asia Pacific region.

The company faces threat from its competitors which are involved in offering specialized products and services at prices which are less than that of the company. The company has ample opportunities to expand beyond Australia and can introduce customer loyalty initiatives to build brand loyalty.

The primary purpose of the board is to protect the interest of the shareholders keeping in mind the interest of other stakeholders of the company. The charter of the board clearly states the policies and responsibilities of individual stakeholder. There are nine members currently on the board out of which eight are non-executive and independent members. The chairman of the board is selected amongst the non-executive independent members of the board. The company has reviewed the relationships of all the members of the board and it can be safely concluded that the board is independent.

As discussed in the remuneration report present in the annual report of the company for the year 2021, the board has approved a one-off performance tested share which would be granted to the Managing Director of the group along with the chief financial officer of the group and the managing director. The KEPP awards for the year 2021 to the group’s managing director and the chief financial officer equaled more than 95 percent of the maximum remuneration opportunity of both. The remuneration framework of the company comprises of fixed annual remuneration and a component of variable at risk remuneration with the participation in KEEPP plan. The primary purpose of the remuneration policy is to retain outstanding talent into the company (Annual report, 2021).

The KEEPP plan is a remuneration incentive scheme which measures the individual executive on the basis of financial performance, individual performance and objectives and safety performance measures. The board conducted a remuneration review of the board members and recommendations were made to increase the remuneration of three of the board members from previous levels. The annual fee that was paid to the audit and risk committee was equal to $110,000 in the year 2021 (Corporate governance/WEX, 2021). The following image represents the annual fees paid to the members of the board:

Industrials Segment

Figure 1 – Annual report 2021

The governance policies of the company plan to include a diverse base of workforce for the purpose of meeting the shareholder’s demand and requirements. The company focusses on developing a wide range of members with diverse strength and qualities.

The following table represents the debt to equity ratio of the company for the past 10 years:

Source: Macrotrends/WEX

The debt to equity ratio of the company witnessed a significant jump in the last quarter of the year 2017 where the company raised long-term debts to the level of $2.03 billion. Since then, the company’s capital structure is dominated by debt with equity capital being less than debt capital. The following table represents the debt to equity ratio of the company on a quarterly basis for the period starting from 2020:

Source: Macrotrends/WEX

As it can be observed that the debt equity ratio of the company has been on the rise since the beginning of 2020. The company has a peak debt to equity ratio of 4.88 till the second quarter of 2022.

The group maintains a diverse source of funding and also focusses to maintain its presence felt in the markets of financing. The current long-term debt and obligations has increased to $3022 million in the year 2021 from a level of $2656 million in the year 2020. In the year 2021, the group issued bonds with a maturity of seven years with a market value of $650 million and an interest rate of 1.94 percent. The company also issued sustainability linked bonds worth $350 million with a maturity of 10 years and an interest rate of 2.55 percent per year. The interest coverage ratio of the company for the past five years has been shared below:

The coverage ratio since then has improved and remained stable throughout 2017 to 2019. The interest coverage ratio of the company fell down significantly in the year 2020 due to operating loss as a result of the pandemic effects. The ratio improved significantly in the year 2021 with an improved operating profit.

The recent year’s capital expenditure was equal to $896 million which was 3.3 percent higher than the prior year and the majority of the investment was made in data and digital initiatives. The target stores were converted into Kmart stores and the Mt Holland Lithium project was also looked upon. The following table represents the capital expenditure of the company during the past five years.

Source: Annual report 2021

As it is observed from the table above the company has been increasing its investment in the capital assets per year since 2017. The company did not engage into any mergers and acquisition activity in the recent years. The following chart represents key financial data of the company including the capital expenditure of the firm for the past years and the Cash flow per share generated by the firm:

Source: Market screener/WEX

The capex of the company is expected to increase in the following years to come. The investment in capital assets has resulted in an increase in the cash flow per share as the CF per share in the year 2019 was 2.40 and it jumped to 4.02 in the year 2020. The return on equity for the stock also witnessed a steady rise as the return on equity was around 19.2 percent in the year 2019 which went up to 22.1 percent in the year 2020 and it went further up in the year 2021 to the level of 26.1 percent. The assets of the firm are decreasing per year with a big write off experienced by the firm in the year 2020 where the value of the assets went down from $78483 million to $13,531 million in the year 2020 but went on to improve in the year 2021 to $16,532 million.

The following table represents the dividend distribution policy of the company for the period starting from 2016 to 2021:

Source: Morningstar/WEX

The firm has a policy of paying cash dividends two times a year. The company pays an interim dividend in the first half of the year before paying the final dividend at the end of the accounting period.

The company has tried to maintain a pay-out ratio more than 100 percent. The dividend of the company has been rising consistently throughout the years starting from 2016 to 2021. The dividend paid for the company in the year 2016 was equal to 1.86 per share which grew to 3.78 per share in the year 2021. The dividend yield of the company was growing till the year 2018 after that the yield of the company began to fall and currently is at the lowest level of 3 percent in the year. The company has recently paid dividends of 90 cents per share on 23^rd of February 2022 and the company had paid a dividend of 80 cents per share. The abnormal daily returns of the stock one day before, the same day and the day after the payment of dividend are represented in the table below:

When the stock paid a dividend on 2^nd September 2021 the stock price yielded negative returns all three days around the dividend payments. Whereas the stock had provided a positive daily return on 2^nd February 2022 at the date of payment of the dividend. The reaction of the market was inconsistent in the past two recent dividend payments events hence any conclusion regarding the appropriate dividend payment and market efficiency theory cannot be made.

Conclusion

The primary goal of Wesfarmers is to deliver returns which satisfy the shareholders of the company by means of discipline and managing the portfolio of the businesses of the company in an efficient manner. One of the important areas that the company focusses is maintaining a strong framework focussing on the development and execution of strategies by the management. Each division is overseen by a divisional board of directors or steering committee that includes the Wesfarmers Managing Director and Chief Financial Officer, and is guided by a Group-wide operating cycle and governance structure. The company aims to create value by achieving operational excellence and satisfying the needs of the company. The purpose of the management is to add value to the portfolio by getting involved into profit reaping activities and ensure a high level of sustainability through long-term management plans.

References

(2022). Retrieved 29 April 2022, from https://sitefinity.wesfarmers.com.au/docs/default-source/reports/2021---wesfarmers-annual-report.pdf?sfvrsn=9d9111bb_2

Bloomberg - Are you a robot?. (2022). Retrieved 29 April 2022, from https://www.bloomberg.com/profile/company/WES:AU

Group, D. (2022). Corporate governance . Retrieved 29 April 2022, from https://www.wesfarmers.com.au/who-we-are/corporate-governance

Group, D. (2022). The Wesfarmers Way. Retrieved 29 April 2022, from https://www.wesfarmers.com.au/who-we-are/the-wesfarmers-way

Wesfarmers Ltd (WES) Quote - XASX | Morningstar. Morningstar.com. (2022). Retrieved 2 May 2022, from https://www.morningstar.com/stocks/xasx/wes/quote.

Yahoo is part of the Yahoo family of brands. (2022). Retrieved 2 May 2022, from https://finance.yahoo.com/quote/WES.AX/history?period1=1619730339&period2=1651266339&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true