Why Coles (ASX:COL) might be a good ASX share for dividends

Coles Group Ltd (ASX: COL) could be one of the ASX dividend shares to consider for income.

Coles operating segments

The parent business has a number of different operating segments. There’s Coles supermarkets – it has more than 800 across the country. Coles also offers Coles Online for customers to buy products digitally.

Coles Group also has over 900 stores with brands like Liquorland, Vintage Cellars and First Choice Liquor.

Coles Express is one of Australia’s biggest fuel and convenience retailers, with over 700 sites.

It owns half of flybuys that has over eight million active members. There is also Coles Financial Services, which provides insurance, credit cards and personal loans in Australia.

How is the Coles dividend going?

The latest movement with the dividend was the FY21 half-year result. That was where the Coles board decided to increase the dividend by 10% to 33 cents per share.

That brought the rolling 12 months of dividends to 60.5 cents per share. At the current Coles share price, that means the trailing grossed-up dividend yield is currently 5.25%.

Commsec dividend forecast numbers suggest further dividend growth in FY22 and FY23.

The FY22 dividend is predicted to be $0.62 per share. Then there’s growth of almost 5% of the dividend in FY23 to $0.65 per share.

By the time FY23 ends, Coles is expected to have a grossed-up dividend yield of 5.6%.

Profit pays for dividends

Businesses pay for their dividends from the profits that they make each year.

Coles has seen profit increase materially since the onset of COVID-19.

In the first six months of FY21, not only did Coles experience high single digit sales growth but it experienced operating leverage which helped grow profit faster.

HY21 sales revenue increased by 8.1%, earnings before interest and tax (EBIT) grew by 12.1% and net profit after tax (NPAT) went up 14.5% to $560 million. Earnings per share (EPS) also increased 14.5% to 42 cents.

That result included significant levels in its digital consumer sales growth, with an increase of 61%. That was partly thanks to strategic investments made in the user experience and capacity leading to significant improvements in the perfect order rate and customer satisfaction.

One of the factors that is driving margins higher is the own brand revenue. Half-year own brand revenue grew 10% with 11 own brand products winning ‘product of the year’ awards.

Coles is working on its business with its ‘smarter selling’ strategy that is on track to produce more than $250 million of cost savings in FY21.

Some of those initiatives include better flow of fresh foods with a more efficient supply chain, providing greater shelf life. It’s looking for profit protection with optimising the markdowns of its products and loss prevention (entry gates, public view monitors etc).

Data and technology enhancements are also planned to be used to reduce manual handling of cartons and improve availability for customers.

At the current Coles share price, it’s valued at 22x FY21’s estimated earnings according to Commsec. . 

The post Why Coles (ASX:COL) might be a good ASX share for dividends appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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