Coles Group (ASX:COL) Will Pay A Larger Dividend Than Last Year At AU$0.28

The board of Coles Group Limited (ASX:COL) has announced that the dividend on 28th of September will be increased to AU$0.28, which will be 1.8% higher than last year. This takes the dividend yield from 3.3% to 3.3%, which shareholders will be pleased with.

Check out our latest analysis for Coles Group

Coles Group's Dividend Is Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before this announcement, Coles Group was paying out 77% of earnings, but a comparatively small 37% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Looking forward, earnings per share is forecast to fall by 2.9% over the next year. However, if the dividend continues along recent trends, we estimate the payout ratio could reach 81%, meaning that most of the company's earnings are being paid out to shareholders.

Coles Group Is Still Building Its Track Record

The company has maintained a consistent dividend for a few years now, but we would like to see a longer track record before relying on it. Since 2019, the first annual payment was AU$0.50, compared to the most recent full-year payment of AU$0.61. This means that it has been growing its distributions at 10% per annum over that time. Coles Group has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

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. Coles Group's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. This isn't the end of the world, but for investors looking for strong dividend growth they may want to look elsewhere.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. 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. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 2 warning signs for Coles Group that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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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.
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