Income Investors Should Know That Coles Group Limited (ASX:COL) Goes Ex-Dividend Soon

Coles Group Limited (ASX:COL) stock is about to trade ex-dividend in four days. You will need to purchase shares before the 26th of February to receive the dividend, which will be paid on the 26th of March.

Coles Group's next dividend payment will be AU$0.33 per share. Last year, in total, the company distributed AU$0.60 to shareholders. Last year's total dividend payments show that Coles Group has a trailing yield of 3.7% on the current share price of A$16.41. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Coles Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 77% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 35% of the free cash flow it generated, which is a comfortable payout ratio.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Earnings per share are basically flat over the past 12 months. Growth is a prerequisite for an outstanding dividend company over the long term, but we wouldn't read too much into flat numbers over any one year time frame. A high payout ratio of 77% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, Coles Group could be signalling that its future growth prospects are thin.

One year is a very short time frame in the pantheon of investing, so we wouldn't get too hung up on these numbers.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last two years, Coles Group has lifted its dividend by approximately 10% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid Coles Group? Earnings per share have been flat and Coles Group's dividend payouts are within reasonable limits; without a sharp decline in earnings we feel that the dividend is likely somewhat sustainable. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Coles Group's dividend merits.

So while Coles Group looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, we've found 2 warning signs for Coles Group that we recommend you consider before investing in the business.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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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