WOOLWORTHS LIMITED

Analyst Report
Griffith University
Osmolovskaia Irina, 5004826

3210AFE Advanced Corporate Finance, Osmolovskaia Irina, 5004826

Contents
Contents................................................................................................................ 1
Introduction........................................................................................................... 2
Historical Dividend Policy Analysis.........................................................................2
Firm Characteristics............................................................................................... 3
Internal Environment ............................................................................................ 4
External Environment ........................................................................................... 4
Stakeholders.......................................................................................................... 5
Conclusion............................................................................................................. 5
References............................................................................................................. 6
Appendix................................................................................................................ 8

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3210AFE Advanced Corporate Finance, Osmolovskaia Irina, 5004826

Introduction
This report has several purposes. First, it provides an overview of Woolworths
Limited (WOW) dividend policy, specifically, a pattern to the dividends over
last 5 years, how they related to earnings and cash flows during this period,
currently companys characteristics and how WOW compared with other
companies within the Retail and Wholesale industry in terms of dividend
policy. Secondly, it examines executive remuneration, specifically, what WOW
is planning to achieve in the short and long term, and whether economic
conditions contribute to achieving these goals and how effective the WOWs
plans meet the expectations of stakeholders.

Historical Dividend Policy Analysis

By analysing data for last 5 years we can see that WOW consistently
increased dividends per share from $1.26 per share in 2012 to $1.39 per
share in 2015, but, in 2106, dividends significantly dropped to $0.77 per
share (Appendix 1). Total amount of dividends was paid $1,550.8 million,
$1,658.8 million, $1,722.7 million, $1,758.3 million and $981.2 million in
2012, 2013, 2014, 2015 and 2016 respectively (Appendix 1). However,
payout ratio of WOW consistently decreased every year and was 85.36% in
2012, 73.42% in 2013 and 70.27% in 2014 (Appendix 1). In 2015 we can see
the sharp increase of payout ratio up to 81.93% and then significantly
dropped to -79.46% in 2016 (Appendix 1). Divided yield decreased during
2012, 2013, 2014 and was 4.78%, 4.05% and 3.84% respectively, then sharp
increased by 5.07% in 2015 and decreased to 3.75% in 2016 (Appendix 1).
Changes in dividends and payout ratio related to changes in earnings, so
increasing dividends per share and at the same time decreasing payout ratio
for period from 2012 to 2014 due to the fact that earnings increased in this
period from $1.49 per share in 2012, $1.83 per share in 2013 to $1.97 per
share in 2014; but earnings decreased to $1.71 per share in 2015 and
dropped to -$0.98 per share in 2016, and we can see that it has incurred in a
decrease in the payment of dividends, such as dividends per share and
payout ratio, as mentioned above (Appendix 1). Dividends per share did not
exceed earnings per share for period from 2012 to 2015, whereas in 2016

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3210AFE Advanced Corporate Finance, Osmolovskaia Irina, 5004826

earnings per was negative, as mentioned above, but WOW paid dividends
$0.77 per share (Appendix 1).
If we will compare free cash flow to equity per share and dividends per share,
we will see that during 2012 and 2013 dividends exceeded free cash flow to
equity: dividends were $1.26 per share, while free cash flow to equity were
$0.39 per share in 2012 and dividends were $1.33 per share, whereas free
cash flow to equity were $0.96 per share in 2013 (Appendix 1). So during this
period WOW returned more cash to stockholders than got it and expected to
improve cash flow in the future. During next two years we observe the
opposite situation: free cash flow to equity per share exceeded dividends per
share. FCFE equalled $1.39 per share, dividends equalled $1.37 per share in
2014 and FCFE equalled $1.46 per share, dividends equalled $1.39 per share
in 2015 (Appendix 1). Thus, WOW accumulated cash. During 2016 FCFE
decreased to $0.61 per share; dividends also decreased, but slightly
exceeded FCFE and equalled $0.77 per share (Appendix 1). Thus we can see
that earnings of WOW are volatile and swing from year to year and this
company chooses to pay more than its FCFE in down periods and hopes to
make up for it when earnings recover.

Firm Characteristics
Woolworths Limited is big company, so it can easily to convey information to
financial markets, so it is not necessary for it to use dividend policy as a
signal. The target of Board of WOW is an after tax dividend payout ratio of
70%, subject to trading performance. Also Woolworths Ltd. has Dividend
Reinvestment Plan, what allow to holders of ordinary shares reinvest all or
part of their dividends in ordinary shares in the company. This company has
457,031 shareholders, holding 1,278,758,725 fully paid ordinary shares. Its
marginal stockholders are institutional investors, such as superannuation
funds and corporations, and Australian individuals. They prefer dividend
rather than buyback.
Australian

imputation

Individuals want to have regular cash income and

tax

system

allows

avoid

double

taxation.

Superannuation funds have low tax brackets and use the tax credit to offset
tax liabilities interest income. Corporations are given special protection from

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3210AFE Advanced Corporate Finance, Osmolovskaia Irina, 5004826

taxation on dividends they received from other companies.

Finally, if

desired, they can to sell their shares on the secondary market at any time.
By comparing dividend policy of Woolworths Limited with its primary
competitors, such as Wesfarmers Limited and Metcash Limited, we can see
that in 2016 financial year WES had the highest out these companies payout
ratio, which equalled 514.74%; whereas WOW had negative payout ratio,
which equalled -79.46%, and Metcash Limited suspend dividend payments
(Appendix 2). As regards dividend yield, average figures for period from 2012
to 2016 equal 4.30%, 4.60% and 5.70% for WOW, WES and Metcash
respectively (Appendix 2). So we can see that WOW has lowest payout ratio
and average dividend yield out its primary competitors. Given WOWs
characteristics this company pays reasonable amount of dividends.

Internal Environment
The current financial result of Woolworths Limited is disappointing. Sales
decreased to $58.1 billion, net profit after tax attributable to shareholders
decreased by 39.2%. As result, the Board have announced a reduced final
dividend to $0.33 per share, what down 54.2% on previous year. In order to
restore shareholder value, it is planned focussed on a three to five year
transformation of business and make the following reforms: to exit
businesses that are underperforming, such as Home Improvement, to
separate BIGW and EziBuy and to explore options for the sale of EziBuy, to
pivoted capex spending on stores towards refurbishing over 80 Australian
Supermarkets, to close of 30 stores. There are some key priorities: building
a customer and store-led culture and team, generating sustainable sales
momentum in Food, evolving Drinks business to provide even more value
and convenience to customers, empowering portfolio businesses to pursue
strategies to deliver shareholder value, becoming a lean retailer through
end-to-end process and systems excellence (Woolworths Annual Report
2016, p. 12).

Also, a key metric in WOWs long-term incentive plan is

durable performance through improved sales productivity in its stores

(Woolworths Annual Report 2016, p. 12). In order to achieve this goal, WOW
invests in a Store Renewal program and slowed the deployment of new
stores. All companys goals are feasible and will result in a significant
increase in revenue and restore shareholder value.
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3210AFE Advanced Corporate Finance, Osmolovskaia Irina, 5004826

External Environment
According to the Australian Bureau of Statistics, current economic conditions
for Retail and Wholesale trade industry are favourable and has tendency to
improve; the trend estimate rose 0.1% in June 2016, 0.1% in July 2016 and
0.1% in August 2016. The trend estimate for Food retailing rose 0.2%, for
Supermarket and grocery stores rose 0.2%, for Liquor retailing rose 0.2% and
for other specialised food retailing was relatively unchanged in August 2016.
The trend estimate for Clothing, footwear and personal accessory retailing
also rose 0.5%, whereas for Department stores fell 0.7%. Regarding the
Australian turnover, it rose 2.6% in August 2016 compared with August 2015.
Thus, we can see that the current economic conditions make it possible to
start implementing WOWs plan such as long-term performance through
improved sales productivity in stores by investing in a Store Renewal
program.

Basically, this practice does not differ in a great extent from

market pay practices in similar companies.

Stakeholders
In general, plans of Woolworths Limited are effective in driving performance
and meeting the stakeholders expectations. The media, probably, will not
too react and just will report news related to Woolworths Limited. The same
may say about particular communities or social or political activists.
Regarding the employees, there are two sides of the coin. On the one hand,
people will remain unemployed due to the closure of some stores. On the
other hand, in order to achieve improved performance, employees should be
adequately rewarded and educated. It will require WOW to improve
effectiveness of reward system such as commissions, bonuses, education
sponsorship, Career Development Program and etc.; so employees will have
the benefit.
Regarding the shareholders, the decisions and investments, which were
made in last financial year, for the rebuilding of WOW, had impact on the
financial results and returns to shareholders. So now all efforts committed to
restoring shareholders value, by exiting underperforming businesses, slowing
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3210AFE Advanced Corporate Finance, Osmolovskaia Irina, 5004826

the deployment of new stores and investing in a Store Renewal program.
Thus, the likely reaction of shareholder and shareholder advocates will be
positive.

Conclusion
Woolworths Limited pays reasonable amount of dividends given the current
characteristics of the company. The earnings of WOW are volatile and swing
from year to year and this company chooses to pay more than its FCFE in
down periods and hopes to make up for it when earnings recover. Due to
decreasing of performance during last year, it is planned focussed on a three
to five year transformation of business, in order to restore shareholder value.
A key metric in long-term incentive plan is durable performance through
improved sales productivity in its stores by investing in a Store Renewal
program and slowing the deployment of new stores. This plan is effective in
driving performance and meeting the stakeholders expectations, such as the
shareholders and the employees. The current economic conditions contribute
to achieving this goal.

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3210AFE Advanced Corporate Finance, Osmolovskaia Irina, 5004826

References
1. Damodaran, A. (2015). Applied Corporate Finance (4th ed.). Milton, QLD,
Australia: John Wiley & Sons Australia Ltd.
2. Reilly, F. K., & Brown, K. C. (2012). Investment Analysis & Portfolio
Management (10th ed.).
3. Bloomberg
4. Australian Bureau of Statistics. (2016). Retail Trade, Australia, Aug 2016,
(Catalogue No. 8501.0). Retrieved from
http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/8501.0Main
%20Features3Aug%202016?
opendocument&tabname=Summary&prodno=8501.0&issue=Aug
%202016&num=&view=
5. Woolworths Annual Report 2016,
http://www.woolworthslimited.com.au/icms_docs/185841_Annual_Report_
6.
7.
8.
9.

2016.pdf
Woolworths Limited, http://www.woolworthslimited.com.au/
Metcash Limited, http://www.metcash.com/
Wesfarmers Limited, http://www.wesfarmers.com.au/
Australian Securities Exchange, Woolworths Ltd.,

http://www.asx.com.au/asx/research/company.do#!/WOW
10.Yahoo Finance, Woolworths Ltd., https://au.finance.yahoo.com/q/ks?
s=WOW.AX
11.Woolworths Financial Prospectus,
http://www.woolworthslimited.com.au/icms_docs/129892_Woolworths_Fina
ncial_Prospectus_PDF.pdf
12.Corporate Responsibility Report 2015, Woolworths Ltd.,
http://woolworthslimited2015.csr-report.com.au/sustainabilitystrategy.html
13.Australian Financial Review, Woolworths Ltd.,
http://www.afr.com/search.html?ss=afr.com.au&text=WOOLWORTHS
LIMITED
14.The Wall Street Journal, Woolworths Ltd.,
http://quotes.wsj.com/AU/XASX/WOW/company-people
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3210AFE Advanced Corporate Finance, Osmolovskaia Irina, 5004826

Appendix
Appendix 1: Dividend Policy Analysis

Source: Bloomberg & Estimate

Appendix 2: Dividend Policy Comparison (Wesfarmers Ltd vs.

Woolworths Ltd vs. Metcash Limited)

Source: Bloomberg & Estimate

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