Coles Group Limited (ASX:COL) will increase its dividend on the 28th of September to AU$0.28, which is 1.8% higher than last year. This takes the dividend yield from 3.3% to 3.3%, which shareholders will be pleased with.
Coles Group's Dividend Is Well Covered By Earnings
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before this announcement, Coles Group was paying out 77% of earnings, but a comparatively small 37% of free cash flows. This leaves plenty of cash for reinvestment into the business.
Over the next year, EPS is forecast to fall by 2.9%. If recent patterns in the dividend continue, we could see the payout ratio reaching 81% in the next 12 months, which is on the higher end of the range we would say is sustainable.
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 2 years, which isn't that long in the grand scheme of things. The first annual payment during the last 2 years was AU$0.50 in 2019, and the most recent fiscal year payment was AU$0.61. This means that it has been growing its distributions at 10% per annum over that time. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.
Dividend Growth May Be Hard To Achieve
The company's investors will be pleased to have been receiving dividend income for some time. Unfortunately, Coles Group's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. 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. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for Coles Group that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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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