(a) Apply ethical knowledge in financial decision–making.
(b) Analyse different ways of capital raising.
(c) Apply methods for stocks and bonds valuation.
(d) Identify and apply dividend policies.
(e) Describe diversification strategies.
(f) Identify financial policies adopted by corporations.
(g) Work effectively as part of a team.
(h) Identify potential organizational challenges and describe corporate governance mechanism to help overcome these challenges.
Answer:
Introduction
The present report is undertaken to provide a comparative analysis of the performance of the two companies listed on Australian Stock Exchange (ASX). The comparative analysis is performed on the basis of information extracted from the annual reports of both the companies. The companies selected in this context are Woolworth Pty ltd and Wesfarmers Pty ltd listed on ASX website, both are recognized as supermarket giants of Australia. The comparative analysis of the two companies is carried out on the basis of the information extracted related to major shareholders, executive management, directors compensation, equity compensation, debt structure, divided policy, mergers and assessing their financial performances.
Major Shareholders
The major objective of Wesfarmers Pty Ltd is to deliver higher returns to the shareholders through adoption of adequate strategies leading to sound financial management and thus promoting the business growth (Bazley, and Robinson, 2014).
As presented in the above figure, the major shareholders of the company holding about 5% of its shares are HSBC (21.25%), JP Morgan Nominees Australia Limited (12.29%) and Citicorp Nominees Pty Limited (5.77%). On the other hand, the major shareholders of Woolworths as analyzed from its annual report can be depicted as follows.
The major shareholders of Woolowrths are also same as in Wesfarmers holding about 5% of its shares. These are HSBC (22.22%),JP Morgan (11.91%), Citicorp Nominees Pty Limited (6.82%) and BNP Paribas Nominees Pty Ltd (6.28%). Therefore, it can be said that Woolworths have four major shareholders and Wesfarmers have 3 major shareholders holding about 5% of their shares.
Executive Management of the company
Wesfarmers is committed to develop a strong executive management team to provide satisfactory return to the shareholders. The company has developed a strong and competent leadership team having adequate skills and knowledge to effectively carry out the business operations and functions. Rob Scott is the Chief Executive Officer of the company who has joined the company in the year 2004 possessing experience in the investment banking industry. Michael Chaney is the Chairman who was initially the finance director in the company and having a career background in geology and corporate finance. Terry Brown, joined the company in the year 1996 have previously worked in the company in the role of Chief Financial Officer and has remain a member of the executive leadership team. Maya Vanden Driesen, is appointed as Group General Counsel in the year 2015 and has previously also worked as senior legal counsel and general manager for legal litigation in the company. She has also practiced law at Parker & Parker Downings Legal before joining the company. John Durkan is the managing director of who has joined the company in the year 2013 and is having a high knowledge about buying products and having an experience of about 17 years with Safeway Stores Plc as the Chief Operating Officer. Therefore, it can be said that executive management team of the company is well-diversified having different skill set and competencies to assist them in carrying out their job functions appropriately (Megginson, Lucey and Smart, 2008).
Woolworths have also developed a competent team lead by Brad Banducci, CEO and Managing Director of the company. Gordon Cairns, independent chairman of the company was appointed in the year 2015. He has an extensive Australia and international experience for the job role of Chairman. The company also has a large team of non-executive directors in the Board having diverse skills and competencies. The company has also placed strong focus on maintaining gender equality in its management structure as major team of its non-executive director in Board is women. Wesfarmers have not emphasis to main gender equality in its executive management team but have developed a strong and competent team of management personnel better than Woolworths.
Directors of Company
Wesfarmers Board at present comprises of nine directors out of which eight are non-executive directors and one director. The executive ad non-executive directors of Board possess high qualifications and large experience in the corporate sector. This enables the company in meeting effectively the strategic priorities of the company The Chairman is selected from the independent non-executive directors and the responsibility is stated in the Board Charter.
On the other hand, the Board of Woolworths also consists of executive and non-executive directors. The presence of appropriate mix of executive and non-executive directors ensure that there is an optimum mix of skills and experience that helps the company to meet its strategic goals and objectives.
Compensation of Directors and Top Executives
Wesfarmers in accordance with the ASX principles has developed an effective compensation structure for the directors and top executives. The remuneration framework of the company aims to develop a strong performance culture motivating the KMP to achieve the company’s strategic goals and objectives. The executive Key Management Personnel (KMP) remuneration is composed of a fixed and variable remuneration. The variable remuneration is composed of a short term incentive and long-term incentive. The fixed annual remuneration is subjected to increase as per the change in the role or responsibility and the variable part of remuneration is based on the performance.
On the other hand, Woolworth has also developed a reward principle and strategy to motivate the directors and top executives for increased job performance. The reward and benefits are incorporated by the company as a part of remuneration framework in order to drive the company long-term performance and achievement of its strategic goals (Moles, Parrino and Kidwell, 2011). The total fixed remuneration part of the compensation structure of directors consists of base salary, superannuation and other tax related benefits. The variable rewards include short-term and long-term incentive rewards and thus driving the performance of the executives and directors. The short-term incentives are provided on the basis of the individual performance and are based on the business outcomes. On the other hand, long-term incentives are consistent with driving the strategic business goals and creating long-term shareholder return (Megginson, Lucey and Smart, 2008). Therefore, it can be said that STI is the reward provided for the current year performance while long-term incentive is reward provided on the basis of long-term sustainable performance.
Remuneration paid to the Directors of Wesfarmers Directors
Remuneration of Directors of Woolworth
Equity Composition
Wesfarmers aims to maintain a capital structure that is able to generate increased return for the shareholders and the Group aims to achieve the objective through developing an adequate capital structure through the combination of equity, reserves and net debt. The equity composition of the company includes issues capital, reserved share, retained earnings and reserves. Reserved shares are the ordinary shares that have been repurchased by the company and are should for future sale and include employee reserved shares. The company has also issued employee share plan and executive equity performance plan. On the other hand, Woolworth’s equity composition includes contributed equity, reserves and retained earnings. The contributed equity includes share capital and share held in trust. The equity instrument reserves include the reserves held due to significant changes in the fair value of the equity securities. The company ahs also issued some new shares under employee long-term incentive plan and dividend reinvestment plan.
Debt structure and sources of debt for both the selected companies
Capital structure refers to the proportion of the best and equity capital that has used by the company to finance the assets and to meet the needs of expansion. It is essential to manage the capital structure of the company in order to meet the objectives of the company and to enhance the long term shareholder value through optimising its weighted average cost of capital. It is important to retain some part of the retained earnings so that sufficient amount can be saved for long term growth and to undertake the capital management initiatives. On looking at the annual report of year 2017 for both the companies it has been found that Woolworth mainly uses debt sources as a maximum part of finance the long term business projects and to maintain the working capital needs. The debt capital that is owned by the Woolworth in year 2017 mainly consist of bank loans, long term securities, Notes payable and finance Leases. There is decrease in the debt capital of the company in year 2017 as compared to year 2016. Woolworth is also dependent upon the equity capital to finance the capital needs of the business and detail of equity finance can be seen from the below images (Annual Report 2017, Wesfarmers).
On the other hand, the capital structure of Wesfarmers is consisted of both equity and debt as the major sources of finance. The debt mainly consists of bank debt and capital market debt as the major debt capital types. On looking at the balance sheet it has been found that Wesfarmers mainly uses equity capital as the major source of finance as compare to the debt capital (Annual Report 2017, Woolworth).
Overall it can be said that capital structure of Wesfarmers is much better than the capital structure of the Woolworth. It is because Wesfarmers uses equity capital as major source of finance and it has lower debt equity ratios as compare to Woolworth in year 2017. It can be look from the annual report of Woolworth that debt capital owned by the company is 2777.00 million dollars and equity capital of 9526.00 million dollars which means debt equity ratio of the company is 0.29 times (Brigham & Michael, 2013). It can be look from the annual report of Wesfarmers that debt capital owned by the company is 4066.00 million dollars and equity capital of 23941.00 million dollars which means debt equity ratio of the company is 0.17 times (Annual Report 2017, Wesfarmers).
Dividend Policy
The dividend policy means amount of revenue that is distributed by the company in form of dividends. Every company uses mainly net profit left after meeting all the expenses to pay in form of dividend. Sometimes company uses retained earnings to pay the dividend when fails to earn the sufficient net profit and it is essential to declare the dividend. It is not compulsory to pay complete amount in form of dividend. Company pays either full or some part of net profits in form of dividends. The proportion of net profit paid in form of dividend is refers to as dividend payout ratio (Krantz, 2016).
Dividend payout ratios of both the companies are as follows:
|
Dividend Payout Ratio of Wesfarmers and Woolworth
|
|
Year
|
2015
|
2016
|
2017
|
|
Wesfarmers
|
198.9
|
80.3
|
368.9
|
|
Woolworth
|
87.5
|
—
|
37.4
|
(Annual Report 2017, Wesfarmers and Annual Report 2017, Woolworth)
The dividend policy of the Wesfarmers is more aggressive as compare to the dividend policy of the Woolworth and it is clearly reflected from the above table. In year 2017, Wesfarmers has paid the dividend which is almost four times the earning per share of the company in that year. On the other hand, Woolworth has paid the dividend per share of about 37.4 % of the earning per share of the company in year 2017. So it can be said that dividend policy of Wesfarmers is better as compare to Woolworth or it can be said that Woolworth follow the aggressive policy for paying the dividend (Davies & Crawford, 2011).
Mergers and Acquisitions
On the basis of complete analysis of the annual reports of last two years it has been found that company has not acquired any new company or subsidiary. There is no merger and acquisition done by the Woolworth in last two years, however company has acquired EziBuy Holdings Limited in the year 2013 and it is the major acquisition of the company in last five years. There has been no merger process that has been taken place in this company. In addition to the EziBuy Holdings Limited Woolworth has acquired other hotel venues and other business in the year 2014. The cost of business acquisition can be seen from the cash flow statement and it is mentioned that about $374.3 million dollar as given in cash flow statement (Annual Report 2017, Woolworth).
As found in the annual report of the Wesfarmers, the company has acquired UK Home improvement and Garden Retailer Homebase from the Home Retail Group in year 2016. This acquisition is completed in February and about $ 340 million was the total expenditure that has been made by the Wesfarmers to acquire this company (Annual Report 2017, Wesfarmers).
Financial Performance of the both companies
|
Ratios
|
Woolworth
|
Wesfarmers
|
Industry
|
|
Gross Profit
|
28.61%
|
31.84%
|
30.23%
|
|
Net Profit
|
2.75%
|
4.22%
|
3.49%
|
|
Return on Assets
|
6.61%
|
7.10%
|
6.86%
|
|
Return on Equity
|
17.04%
|
12.25%
|
14.65%
|
|
Current Ratio
|
0.79
|
0.93
|
0.86
|
|
Quick Ratio
|
0.15
|
0.25
|
0.2
|
|
Debt Equity Ratio
|
0.29
|
0.17
|
0.23
|
|
EPS
|
1.19
|
1.27
|
1.23
|
|
Asset Turnover Ratio
|
2.40
|
1.68
|
2.04
|
(Morning star: Wesfarmers, 2018 and Morning star: Woolworth, 2018)
The above table shows the some important financial ratios of Woolworth and Wesfarmers with their industry average. On looking at the above table it can be said that financial performance of Wesfarmers as compared to Woolworth is much stronger due to higher profitability and liquidity in the company. The Earning share of the Woolworth is 1.19 while it was 1.68 for Wesfarmers that indicates that Wesfarmers has better earning capability as compare to Woolworth (Annual Report 2017, Woolworth).
Value of Stock and comparison with the current market price of the company
In order to value the stock of the company the Dividend growth model has been used. This model is explained below:
× EPS (Bromwich & Bhimani, 2005)
Where,
S1 = Value of Company
Re = Rate of return = 18% (Assumed)
g = Growth rate = 5% (Assumed)
Payout ratio
= 1-(0.05/0.18)
EPS = 1.19 for Woolworth and 1.27 for Wesfarmers
Then, market price of equity will be –
Woolworth = × 1.19 = $ 6.92 (Annual Report 2017, Woolworth)
Wesfarmers = = × 1.27 = $ 7.39 (Annual Report 2017, Wesfarmers)
Current market price of Woolworth = $20.76 (Overvalued)
Current Market Price of Wesfarmers = $16.26 (Overvalued) (Morning star: Wesfarmers, 2018 and Morning star: Woolworth, 2018)
Conclusion
Thus, it can be said on the basis of comparative analysis of both the companies that they are disclosing adequate information in their annul reports for supporting the decision-making of end-users. However, Wesfarmers financial performance for the current year is better than Woolworths as assessed through the calculation of financial ratios for both the companies. Both the companies have developed their annual report in accordance with AASB and Corporations Act 2001 to effectively address the varying needs and requirements of the stakeholders.
References
Annual Report. (2017). Wesfarmers. Retrieved on 22 April, 2018, from https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0
Annual Report. (2017). Woolworth. Retrieved on 22 April, 2018, from https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf
Bazley, M. and Robinson, P. (2014). Contemporary Accounting PDF. Cengage Learning Australia.
Brigham, F., & Michael C. (2013). Financial management: Theory & practice. Cengage Learning.
Bromwich, M. & Bhimani, A., (2005). Management accounting: Pathways to progress. Cima publishing.
Davies, T. & Crawford, I., (2011). Business accounting and finance. Pearson.
Krantz, M. (2016). Fundamental Analysis for Dummies. John Wiley & Sons.
Megginson, W. L. & Smart, S. B. (2008). Introduction to Corporate Finance. USA: Cengage Learning.
Megginson, W. L., Lucey, B. M., and Smart, S. B. (2008). Introduction to Corporate Finance. USA: Cengage Learning EMEA.
Moles, P., Parrino, R. and Kidwell, S. D. (2011) Corporate Finance. USA: John Wiley & Sons.
Morning star: Wesfarmers. (2018). Retrieved on 22 April, 2018, from https://www.morningstar.com/stocks/PINX/WFAFY/quote.html
Morning star: Woolworth. (2018). Retrieved on 22 April, 2018, from https://www.morningstar.com/stocks/PINX/WOLWF/quote.html
