Is Coles (ASX:COL) a great value ASX dividend share?

Could Coles Group Ltd (ASX:COL) be counted as a great value ASX dividend share? Its yield is getting better as the share price falls.

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Could the Coles Group Ltd (ASX: COL) share price decline mean that the supermarket business is now a good value ASX dividend share idea?

In just over two months the Coles share price has actually fallen by 13%. When a share price falls, it has the benefit not only being cheaper but it also increases the company's trailing dividend yield.

What is the Coles dividend yield now?

Using the last twelve months of dividends, Coles currently has a grossed-up dividend yield of 5.4%.

The broker Morgans expects Coles to pay a FY21 dividend of $0.62 per share, which would equate to a grossed-up dividend yield of 5.5%, which would be a decent increase on the FY20 dividend.

In the FY21 half-year result, Coles' board decided to implement a 10% increase to the interim dividend to $0.33 per share after a 14.5% improvement of the earnings per share (EPS) to $0.42.

The half-year dividend represented a dividend payout ratio of just under 80%, leaving a sizeable amount to re-invest back into the business.

Promising signs from the HY21 result

Whilst the big supermarkets continue to see strong levels of short-term growth – Coles comparable sales growth in supermarkets was 7.2% in HY21 – there are promising signs for longer-term success.

The supermarkets customer satisfaction increased by 3.9 percentage points to 89.8%, compared to the second half of FY20.

Coles has been investing in its online capabilities so that it can fulfil all of the orders. Its business to consumer sales grew 61% with strategic investments made in user experience and capacity leading to significant improvements in its perfect order rate and customer satisfaction.

The company has also been trying to improve its own brand offering – which often comes with higher margins. In the FY21 half-year result it generated own brand revenue growth of 10% with 11 own brand products winning product of the year awards.

Coles is also on track to deliver cost savings of more than $250 million in FY21, with optimised markdowns, better data and technology enhancements and a more efficient supply chain to improve shelf life for customers.

The company is also working on its new Ocado and Witron automation projects. Structural work at the Witron automated distribution centre in Queensland is continuing and approvals received on the NSW distribution centre.

There has been strong growth at its liquor business which includes Liquorland, that division experienced 15.1% sales growth and 36.8% growth of earnings before interest and tax (EBIT). However, it's the supermarkets business that generates a large majority of the revenue and profit.

The Coles CEO Steven Cain said:

Whilst COVID-19 will continue to present challenges it will also continue to present opportunities for change. With a strong balance sheet and team, Coles is well placed to continue delivering on our vision of becoming the most trusted retailer in Australia and grow long-term shareholder value.

What is the Coles share price valuation?

According to Morgans, Coles shares are valued at 21x FY21's estimated earnings. The broker rates Coles as a buy.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of 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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