Wesfarmers (ASX: WES) has become the latest blue chip to feel increasing pressure to ramp up returns to shareholders, with analysts making estimates as to how much excess capital the company could actually be holding.
Although the company has today issued a profit warning on its Target division, strong growth in other sectors including Coles – which drives over half of the company's overall revenue – and Kmart have generated increasingly large pools of cash for the conglomerate, on the back of strengthening inventory turnover. Should the company continue to reduce average inventory days, even higher revenues are expected.
David Errington, a research analyst for Bank of America Merrill Lynch, has estimated that even after Wesfarmers' forecast $2 per share dividend next year, the company's balance sheet will show between $2.4 and $3.6 billion in excess capital. This amount could potentially be put towards increasing the company's payout even higher over the next 2-3 years.
The Australian quoted Errington as saying: "We forecast a sizeable step-up in dividends… and we expect the company to return a sizeable portion of equity… over and above our forecast dividend payments over the coming two to three years."
Supporting this theory, whilst "capital management" is usually the last item on the agenda for the conglomerate's annual strategy briefing, it has become the first item for discussion for this year's briefing on May 29.
As such, Errington has lifted his price target from $45 to $53 – almost 24% above where it is currently priced. Shares in Wesfarmers have today lost 3.5% in value at time of writing due to the profit warning on Target, reversing any gains made yesterday.
Foolish takeaway
With interest rates at an all-time low, a growing trend for investors has been to buy into high yielding stocks. This has prompted corporations such as Westpac (ASX: WBC), ANZ (ASX: ANZ) and Woodside Petroleum (ASX: WPL) to all increase their returns to investors, whilst Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) have made suggestions that they will do the same.
Although Wesfarmers could also put the money towards further acquisitions, a decision to distribute it to shareholders would likely see further increases in the share price.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
