Wesfarmers Limited is a public Australian company that is registered on the Australian Securities Exchange with a ticker symbol as WES. The company is headquartered in Western Australia in Perth and is into the business of chemical, fertilizers, coal mining, and safety products. Wesfarmers is into the conglomerate industry that means it is dealing with various business lines under one group (Annual report Wesfarmers, 2019). The areas in which the business operates include Australia, India, Ireland, United Kingdom and New Zealand. Wesfarmers is one of the largest employers in Australia that is private. There are around 220000 employees that are working with Wesfarmers. The company started as a co-operative for providing services and merchandise to Australian farmers and slowly it grew into a major conglomerate of retail.
The company initially started as a co-operative limited by the Farmers and Settlers Association of Western Australia and today it has become one of the major conglomerates in the country. The growth of the company is impeccable. Also, there are various businesses that are covered under one corporate. This helps in analyzing a broader perspective and also the company has invested in various business and over the period of time has acquired companies and also sell off its parts. The company helps in understanding various perspectives of business that develops an interest in the company. The growth, acquisition and sell off, etc. helps in a better understanding of the various business activities. This enormous growth of the company has led to the development of deep interest in the company.
Capital structure refers to the combination of debt and equity that is used by the company for the purpose of financing its activities and brining in growth (Fukui, Mitton &Schonlau, 2019). Wesfarmers has the capital that includes debt and equity for the firm. The company has total debt at a value of $3029 million. This debt is divided into 2 categories i.e. current and non-current debt. Both the interest-bearing loans that have been taken by the company are unsecured. The company funds its requirement through bank debt and capital market. The current debt of the company is $356 million while Non-current is at $2673 million. The capital market funds are borrowed through the issuance of bonds by the company. Corporate bonds in the foreign and domestic markets are issued in the capital market. So, for the section of debt, the company uses bank and capital market debt only.
The major source of finance for the company is capital market debt while it is expected that the bank debt will significantly reduce in FY21 and increase in FY22 for the company.
Another source of financing the company uses is equity. The total equity of the company is $9971 million. The equity portion of the company included the issued capital, retained earnings and the reserved shares through which the company finances its operations. These are the two methods by which the company finances its operations.
The debt-equity ratio of the company depicts the proportion of debt and the shareholder's equity in financing the business of the company (Indrawan et al, 2017). The debt-equity ratio of the company is at .303. This depicts a healthy position in the company. This shows that equity shareholders will be able to cover all the debts of the company. This is a good position as in case of an emergency where the company has to close down it's functioning, all the debts of the company will get covered by the equity shareholders of the company. This also provides financial leverage as interest expenses of the company are reduced.
Incitec Pivot is one of the major competitors of Wesfarmers and is into the business of manufacturing fertilizers, chemicals and mining services. It is a public traded company and a conglomerate of the mining and manufacturing industry. The capital structure of the company is the same as Wesfarmers. The company also uses the two form of capital that includes debt and equity. The debt of the organization is through bank loans and capital markets. The only difference between the two is that the company has a major portion of bank loan while the funding's through capital markets are low. The debt to equity ratio of the company stands at .36.
This is nearly the same as Wesfarmers. The company has the majority of equity funding and will be able to cover its debt through equity capital which is a good position for the company. This shows that both companies have mostly the same structure of capital for their operations.
If Wesfarmers opt for borrowing more debt than the implications on the following will be:
Tax Saving: The tax can be saved by the company as the interest that is charged is tax-deductible and the actual cost that occurs on the borrowing is less than the rate of interest.
Bankruptcy risk: At present, the business has a very good debt to equity ratio. The debt portion is low which means the company can tap into the debt section and utilize its leverage. Bankruptcy risk is not there as per the finances of the company.
Managerial incentive: Since the debt will increase on the company, the incentives paid out to management will reduce. Management incentives include dividend payment etc. If the company is showing reduced costs and reduction in profits than incentives cannot be distributed at a large scale to the management.
Risk taking: The risk-taking of the firm increases. Since Wesfarmers have a better ratio, the risk will be in control. Otherwise, when a debt is taken, there are various risks that come with it. It includes non-payment of installments. This can happen if the company makes a loss and is low on cash. This will increase the risk of the company. But since Wesfarmers profits are growing and the cash flow depicts a good position, thus the risk-taking for the company is appropriate here.
The company pays out a dividend to the shareholders twice in the year. Interim and final dividends are paid off by the company. The company is paying out the dividends from several years regularly in the form of cash to its stockholders (Annualreport Wesfarmers, 2019). The company has managed to provide dividends to its shareholders throughout the years. This depicts that the company is sharing it's earning with its shareholders.
Paying off the dividends to the shareholders sends a clear message about the brighter future prospects of the company. Paying off dividends over the years shows that the company is generating profits over the years and there are better chances of growth for the company. Shareholders can rely on payout policy as it depicts or demonstrates a solid financial position. It also shows that the company is willing to share its profits with its shareholders. Paying out dividends creates a positive image for the company and helps in its growth as investors are more willing to invest in the company. So, paying off the dividends sends a strong positive message to the shareholders of the company.
The dividend signaling theory demonstrates that an increase in the payouts of dividends indicates positive prospects of the future for the company. The company is already paying off dividends to its shareholders. Over the years, it has improved the amount except in the year 2019 where the dividends have fallen for the company.
Agency cost arises when there is a dispute between the shareholders and the management. This can arise when the shareholders are not being provided with the dividends. But Wesfarmers has been providing the dividends appropriately every year. The only change in the payout policy that can be suggested is that the company should try to maintain an average level of payout and not reduce it over the year. This will create a balance and also certain dividends should be paid off in the form of stock as this will also improve the capital in the company.
Wesfarmers has recently acquired Kidman resources in the year 2019. Kidman resources is a lithium developer and explorer. It develops lithium deposits and also holds gold projects in Western Australia (O’Loughlin, 2019). The company is into the metals and mining industry. Wesfarmers too deals in the metals and mining industry. Synergy has been generated for the company as both the companies' runs in the same field and after acquiring the company Wesfarmers will have enhanced operations and its cliental base will improve. This creates a synergized value for both companies.
There are various anti-takeover provisions that can be applied:
Stock repurchase: It is a method through which the company can purchase back its own shares from the market. This is a very effective defense for the company.
Staggered board: Under this provision, only a certain number of people take the chair of the board again. This reduces the chances of a takeover of the firm.
Golden parachutes: Through this, the top management is paid more than required by the firm so when any other company tries to take over than the higher payments help in gaining the chances of anti-takeover.
The board of Wesfarmers consists of 10 directors that include 9 non-executive directors and also the independent directors for the company. The ratio of independent directors to all the directors stands at 9:10 for the company. The company needs to hire more full-time directors as at present there is only one director who is full time. It is required that an appropriate ratio is being maintained between the independent and dependent directors.
The remuneration of the board of directors is fixed between $2500000 and $15000000. Also, there is a scorecard of KEEPP for the performance management of the directors. This shows the productivity of the directors with respect to the remuneration or the incentives that are being paid to them. The company makes sure that remuneration and the objective of the Wesfarmers are attached so that objective of the company is achieved. The remuneration structure has 33% fixed remuneration while KEEPP is at 67%. This means that the achievement of the object helps in getting more incentives.
The compensation level is appropriate as it includes both the factors of fixed and achievement. The more a person achieves the more the compensation will be received by them as 67% of the compensation is based on the objective achieved through the KEEPP scorecard.
These are the major roles of the board.
Overseeing the performance of the management in the implementation of the strategy.
Overseeing the strategy implementation for addressing the areas of underperformance.
Monitoring the cash flow of the group and reviewing the framework.
The board also reviews the policies and the procedure of corporate governance
Annual report. 2019. Wesfarmers. Available at: https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2019-annual-report223e616999c863f7bfccff00000e9025.pdf?sfvrsn=44f602bb_0
Fukui, T., Mitton, T., &Schonlau, R. J. (2019). Determinants of capital structure: An expanded assessment. Available at SSRN 3293965.
Indrawan, A., Suyanto, S., &Mulyadi, J. (2017). Return On Equity, Current Ratio, Debt Equity Ratio, Asset Growth, Inflasi, danSukuBungaTerhadapDividen Payout Ratio. JurnalIlmiahIlmuEkonomi (JurnalAkuntansi, PajakdanManajemen), 6(11), 1-12.
O’Loughlin, W. (2019). Kidman resources (KDR:ASX). Retrieved from https://rivkin.com.au/members/resources/analysis-updates/kidman-resources-kdrasx
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