Coles Group (ASX:COL) Will Pay A Dividend Of A$0.30

Coles Group Limited (ASX:COL) has announced that it will pay a dividend of A$0.30 per share on the 27th of September. Based on this payment, the dividend yield will be 4.1%, which is fairly typical for the industry.

Check out our latest analysis for Coles Group

Coles Group's Payment Has Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. Before this announcement, Coles Group was paying out 84% of earnings, but a comparatively small 68% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Earnings per share is forecast to rise by 18.1% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 79% - on the higher side, but we wouldn't necessarily say this is unsustainable.

Coles Group Doesn't Have A Long Payment History

The dividend hasn't seen any major cuts in the past, but the company has only been paying a dividend for 4 years, which isn't that long in the grand scheme of things. The annual payment during the last 4 years was A$0.50 in 2019, and the most recent fiscal year payment was A$0.66. This means that it has been growing its distributions at 7.2% per annum over that time. Investors will likely want to see a longer track record of growth before making decision to add this to their income portfolio.

Coles Group May Find It Hard To Grow The Dividend

Investors could be attracted to the stock based on the quality of its payment history. Although it's important to note that Coles Group's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.

Our Thoughts On Coles Group's Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Coles Group's payments, as there could be some issues with sustaining them into the future. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Coles Group is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Coles Group that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.