Coles Group (ASX:COL) Is Due To Pay A Dividend Of A$0.36

The board of Coles Group Limited (ASX:COL) has announced that it will pay a dividend on the 27th of March, with investors receiving A$0.36 per share. This payment means that the dividend yield will be 3.9%, which is around the industry average.

View our latest analysis for Coles Group

Coles Group's Payment Has Solid Earnings Coverage

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, Coles Group was paying out 86% of earnings and more than 75% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but it is still in a reasonable range to continue with.

Over the next year, EPS is forecast to expand by 27.7%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 74% which would be quite comfortable going to take the dividend forward.

Coles Group Doesn't Have A Long Payment History

It is great to see that Coles Group has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. The annual payment during the last 5 years was A$0.50 in 2019, and the most recent fiscal year payment was A$0.66. This implies that the company grew its distributions at a yearly rate of about 5.7% over that duration. The dividend has been growing as a reasonable rate, which we like. However, investors will probably want to see a longer track record before they consider Coles Group to be a consistent dividend paying stock.

Dividend Growth May Be Hard To Achieve

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Earnings per share has been crawling upwards at 3.4% per year. Slow growth and a high payout ratio could mean that Coles Group has maxed out the amount that it has been able to pay to shareholders. This isn't the end of the world, but for investors looking for strong dividend growth they may want to look elsewhere.

Our Thoughts On Coles Group's Dividend

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The payments are bit high to be considered sustainable, and the track record isn't the best. We don't think Coles Group is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for Coles Group that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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