Pinned straw:
Re WES, this is pure indulgence on my part and my favourite WES story. as you may recall WES got caught out badly with the Coles takeover. they wanted the supermarket but were less keen on target and Kmart as i recall, and had lined up PE firms to help fund these acquisitions. as the GFC unleashed itself, the PE firms ran for the hills and WeS was left to fund the lot, solly lew having sold out at an extraordinary high price beforehand. WES needed 2 rights issues to get by, near the share price lows. i dont think Goyder (WES CEO) was ever properly taken to task over that. they did turn coles around in due course, and made up for that error of risk management.
anyway we were talking to goyder later in the middle of the GFC and he told us how difficult it was to secure funding, the banks were pulling credit lines everywhere, even a top credit like WeS was finding it really difficult. that was a timely call, because our next call was a resource mid cap that needed funding. we asked the ceo if he had credit lines in place and he told us no but that would not be a problem. we ran for the hills, saved us a fortune......oh the memories
WES disc. i hold as an income source. they are reasonable capital allocators imo
It really is hard not to be impressed with Wesfarmer's long term performance. I agree @Bear77, it just manages to keep grinding higher -- a solid 'bottom drawer' -type stock.
What's interesting is that while shares have delivered almost 17% pa compound return over the last 5 years, Wesfarmers EPS and DPS has grown at less than 2.5% annually over the same. For a 50 billion giant in relatively mature segments, that's not that awful. I don't think you could realistically expect much more than 5% average annual growth in cash earnings over any extended period of time.
The obvious explanation here is that since 2017 the average annual PE has lifted from 16 to 26 -- That is what has done the heavy lifting in terms of shareholder returns.
You'd never knock it back, but to my mind investors cant expect multiples to continue expanding at that rate forever. After all, 26 is pretty high for a company that has been growing at low single digits, and where the consensus forecast for EPS growth over the next 3 years is 6%pa.
Of course, with a 3.5% fully franked yield, if dividends can likewise show the same growth you probably still end up with a decent return (especially on a risk adjusted basis and accounting for franking credits). So long as multiples dont contract too much..
You can't predict future PEs, but i tend to find it sensible to at least assume a PE more in line with historical norms. You want the company itself (not sentiment) to do most of the work.
As an example, let's say Wesfarmers shoots the lights out and grows EPS at 12% per year for the next three years --- double the consensus guidance -- BUT let's also assume the PE reverts from 26 to 18. The average annual capital gain is only 2%. Let's call that 5-6%pa as a total return with dividends included. Not a disaster, but not great. If you assume a PE of 16, you make a capital loss.
If EPS growth is more like 8%pa over the next 3 years -- still a good way above consensus -- you need a future PE of about 19 just to break even (excluding dividends).
You can make the same argument with Woolies, which is on a PE of almost 28.
I'm not saying PEs will contract, just that they are presently quite high relative the historical average. And to do well from here you really cant afford the PEs to shrink too much.
It's my contention that the market is not naive to the reality of future growth, and the fact that the current valuation is a little stretched. But it is placing a big premium on safety given the various economic storm clouds on the horizon (real or perceived). These are massive, highly liquid and very dependable businesses that will endure for a long time. Buying now is not about finding a market beating return -- it's about long term capital preservation. Well, that's the only way I can explain it (open to other theories).
All that being said, if i held this in my super or something, and I intended to hold for a long, long time, I probably wouldn't fiddle too much. Yeah it's a bit pricey, but I can probably get a fairly reliable income stream and at least outpace inflation over the coming years. The whole idea with bottom-drawer stocks is that you just sit on them, and although you'll experience periods of over-valuation, it'll probably work out really well in the very long run.
I just don't expect the total shareholder return to average double digit rates over the next 3-5 years.