Pinned straw:
30-May-2023: 2023 Strategy Briefing Day Presentation
View The Webcast: https://edge.media-server.com/mmc/p/6iyimda9
02-May-2023: Macquarie Australia Conference Presentation and Address by MD, Rob Scott
For all the latest WES results and presentations: Results & presentations (wesfarmers.com.au)
Today's 2023 Strategy Update (top link above) is long - at 104 slides - so I'm just going to reproduce the 4 that sum up this company best - in my opinion:
So this isn't your average microcap or nanocap stock that is largely under the radar and could go to zero or multibag. No, this one is a large cap that just keeps grinding higher over time. The best way to check how a company has looked after their shareholders is to look at their TSR - Total Shareholder Return - which include share price appreciation and dividends, and assumes that all dividends were reinvested back into the company using their DRP. In this case they also assume full participation in all of WES' capital management initiatives over the years.
Their TSR has well and truly outperformed the All Ordinaries Accumulation Index (XAO) which is represented there by that grey line. In fact, they've absolutely smashed it. Over that period, the All Ords Accumulation Index has performed almost identically to the ASX200 Accumulation Index (XJO). They both include reinvested dividends - that's the "accumulation" bit. Over shorter time periods there can be a little bit of divergence between the XAO and the XJO Indices, but they tend to have very similar returns to each other over decent time periods, like decades. WES, however, has done a LOT better than both of them.
Disclosure: I hold WES shares in real life and here on Strawman.com.
OK, one more slide:
How's this for a mission statement: Their primary objective is...
Tick.
Solvetheriddle
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
Strawman
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.
Rick
I couldnt help to weigh in on the Wesfarmer’s discussion. I don’t own WES because it always seems to be very well priced. That in itself says a lot about the business in regards to the quality and consistency of its earnings.
There has been a lot of reference to the PE and earnings growth, but I’m surprised no one has mentioned ROE. ROE is always the first metric I look at when I get interested in a business (surprise, surprise!)
A quick look at the historical ROE trend says a lot about why the WES share price has done so well.
Take a look at the ROE growth over the last 9 years. ROE has climbed from 8.7% in 2014 to 29.7% in 2022 without falter. This chart is probably the most consistent improvement in ROE I’ve seen of any business . What’s more, future ROE is rxpected to be 32.6% based on forecast earnings. This might help to explains why the PE has lifted from 16 to 26 since 2017.
Source: Commsec
@Strawman raises a good point though. Why is earnings growth single digit, particularly when ROE is 32.6%. The answer is simple, only 20% of future earnings is likely to be reinvested into growth, 20% x 32.6% = 6.5%. But that’s not the total of shareholder cash returns.
Rather than hypothesising returns based on what the PE ratio might or might not be in the future, what if we assumed we never sold the business and worked out our annual rate of return?
What annual return could we expect if we paid $47.67 (the current share orice) for $7.11 worth of equity (current equity) in the business which is forecast to return 32.6% on equity per year.
To value a business using McNivens StockVal formula we usually determine our required rate of return considering risks associated with the businesss and future earnings.
Alternatively we can use the current share price as the valuation and then work backwards to find out the annual rate of return.
This is difficult to do manually using the formula, but using a spreadsheet you can substitute different rates of return until you come up with the current share price as the valuation.
When I did this I came up with an annual return rate of 8.8% (including the franking credits).
You need to consider the level of risk you are taking for a total 8.8% annual return. You also need to be confident WES can maintain a ROE of 32.6% because a lower ROE will also result in a lower annual return for its shareholders.