Should you be worried about Wesfarmers’s (ASX:WES) dividend payment?

Should you be worried about Wesfarmers’s (ASX:WES) dividend payment?

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Knowing how to steer clear of disastrous investments is just as valuable as picking winners - this is why legendary investors such as Seth Klarman always advise prudent risk management. Take Wesfarmers (ASX:WES), for example, which is classed as a conservative super stock by Stockopedia's algorithms.

Wesfarmers is one of the best-known companies in Australia and is engaged in various business operations, such as supermarkets, liquor, hotels and convenience stores, home improvement, and office supplies. The diversified conglomerate also has an industrials division with businesses in chemicals, energy and fertilizers, industrial and safety products and coal.

Wesfarmers (ASX:WES) pays out a rolling 7.25% of its share price in dividend payments - but sometimes a high dividend yield can signal skepticism from the market. How do we know if we can trust Wesfarmers's forecast yield?

One way to check is to see whether its financial health is improving or deteriorating. We want to avoid companies with declining financial health whose dividend payments might be at risk and invest in companies with improving fundamentals and well-supported dividend payments.

Luckily, there is a tried-and-tested checklist tailored precisely to this task.

Why you need to know the Piotroski F-Score

Followers of celebrated accounting professor Joseph Piotroski are well aware of the checklist that made him famous at the turn of the millennium. Piotroski is behind the F-Score: a simple indicator to highlight stocks showing the most likely prospects for outperformance amongst a basket of apparently undervalued companies.

The great thing about the F-Score is that it essentially is an entire quality and fundamental momentum screen in a single number. Applying it as a filter on top of almost any strategy can help to increase returns and reduce risk.

The F-Score is made up of nine checks split up into three main areas of financial analysis. First is profitability, where it examines operating profits and cash flow to make sure the business can sustain itself and pay dividends. Then come three checks on the capital structure of a business, followed by a final look at the firm’s operating efficiency.

Wesfarmers (ASX:WES), its F-Score, and what you need to do about it

Stockopedia applies algorithms to its stream of financial data to automatically calculate the Piotroski F-Score for every stock on the market. It shows that Wesfarmers (ASX:WES) scores 8 out of a possible 9. 

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By investing in companies scoring 8 or 9 by these measures, Piotroski showed that, over a 20-year test period through to 1996, the return earned by a value-focused investor could be increased by an astounding 7.5% each year. Even better, it suggests that the company is well-placed to continue to pay out attractive dividends.

The fact that revenues rose 4% to A$14.39B and net income before extraordinary items increased 59% to A$1.08B for the six months ended 31 December 2018 suggests a degree of operational health, as well. All of this together paints a positive picture regarding Wesfarmers' substantial forecast dividend payments.


What does this mean for potential investors?

Wesfarmers has an F-Score that suggests it could be a promising investment candidate worthy of further research - but it's only a first step. Higher F-Score stocks can still have weaknesses and may trade at premium prices compared to other stocks. We've identified some areas of concern with Wesfarmers that you can find out about here.


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Wesfarmers's StockRank™

High FlyerConservative

Wesfarmers's StockRank™

With a StockRank of 87, Wesfarmers is more attractive than 87% of the 1,896 stocks we cover in Australasia, according to our proprietary ranking system.

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