In contrast to the apparent acceptance on Wednesday of its $2.3 billion in write downs and losses at Target and its Queensland coal mine, investors took a more negative view of Wesfarmers (WES) shares yesterday.
In fact they sold the shares down by more than 3.5% to a closing level of $40.40 as some analysts and investors speculated that the impact of the losses and other factors could force the company to trim its final dividend.
That’s despite Wesfarmers making clear in its announcement that the write-downs would not impact the payout.
“The accounting impairments in Target and Curragh, which will be finalised as part of the Group’s FY2016 annual accounts, are non-cash in nature, have no effect on current trading and will not impact the Group’s compliance with its banking covenants," Wesfarmers told the ASX on Wednesday.
“It is intended that the Group’s final dividend for FY2016 will be determined based on the Group’s net profit after tax (NPAT) excluding the above impairment charges, and will be made in accordance with Wesfarmers’ existing dividend policy,” yesterday’s statement said.
That’s despite the write-downs possibly wiping out the expected 2015-16 profit which will be announced in mid-August.
But Wesfarmers CEO, Richard Goyder seemed to qualify the stance, saying the final dividend this year would depend on net profit before impairment charges.
"Our dividend will ebb and flow with our earnings," Mr Goyder said.
Morgan Stanley got publicity for its view that Wesfarmers will have to slash its dividend in the coming months.
Thanks to the 2.3 billion (pre-tax) write-downs and losses of $350 million in its coal mines (in Queensland and NSW) and Target, Morgan Stanley analysts have lowered their earnings-per-share forecast by 7%.
The broker expects a 10% cut in the Wesfarmers dividend this financial year, from $2 to $1.80.
The Wesfarmers dividend has grown each year since it was rebased to $1.10 in 2009.
"Within our coverage Wesfarmers has one of the highest proportions of retail (Mum & Dad) investor bases," said the Morgan Stanley analysts in a note to clients. "Hence we think the dividend cut likely acts as a negative catalyst."
Morgan Stanley has also lowered its price target from $40 to $39 on lower Target, KMart and Resources earnings.
But Morgan Stanley did see Coles and Bunnings chains continuing to deliver performance for Wesfarmers.
“Wesfarmers has significant exposure to the improving non-food retail cycle through Kmart, Bunnings, Officeworks and Target," the note read. "The longer-term opportunity for Bunnings is still significant given a solid housing cycle and new category opportunities."
