Many investors would have watched with interest last November when Australia's second largest supermarket finally grew up and flew (or was pushed out of) the nest of its former parent company Wesfarmers Ltd (ASX: WES). Wesfarmers shareholders would have had no choice in the matter – and they are now (or at least were) Coles Group Ltd (ASX: COL) shareholders.
But for many others, particularly those inclined towards a nice dividend income, Coles has been an object of curiosity since then.
Last week, Coles announced to the ASX its inaugural earnings report as well as its inaugural dividend – so if you have been weighing up Coles for your own portfolio, you now get a fuller picture from which to make a decision.
So is it finally time to buy Coles shares? Let's take a look…
What did Coles first report tell us?
Long story short –Coles is behaving as a supermarket should. Revenue was up 3% for the year and earnings from supermarkets were also up by around 2%. Coles' Little Shop 2 promotion is reportedly having positive effects for the company and its Liquor division is also performing well.
In an increasingly competitive industry (which will likely only grow more so), Coles is also focusing heavily on cost reductions in order to both reduce prices and improve future earnings. Good progress has been made on the $1 billion 'Smarter Selling' cost program, which involved supply chain automation, reducing energy use and increased distribution centre efficiencies.
The elephant in the room
Since the spin-off, investors have been very curious about what kind of dividend we can expect to see from Coles – and now we have the answer. Coles announced both a final dividend of 24 cents per share and a special dividend (to cover the months following the spin-off) of 11.5 cents. This 35.5 cent dividend represents a yield of 2.65% on current prices or 3.58% if we annualise just the final dividend. This represents a payout ratio of around 80%, which is at the lower range of what management flagged it would pay out.
Foolish Takeaway
Although I think Coles would make a solid addition to an income-based portfolio, I don't see a huge amount of capital growth in its future. Its dividend is reliable but not especially generous (in my opinion), and any dividend investor with a long time horizon might do better elsewhere.
