Coles Group Ltd (ASX: COL) shares have been a popular option for income investors since landing on the ASX boards in 2018 following a divestment by Wesfarmers Ltd (ASX: WES).
It isn't hard to see why the supermarket giant features in countless income portfolios and superannuation funds across the country.
Given the nature of its business, Coles has defensive earnings. This means that its earnings are resilient and often grow even in the toughest economic environments.
For example, the Coles dividend was one of only a handful that continued to grow during the COVID pandemic.
It has continued to grow since then, with the Coles board declaring a 66 cents per share fully franked dividend in FY 2023.
This represents an 80% payout ratio, which was in line with its dividend policy of paying out 80% to 90% of earnings. Management notes that this policy allows Coles to reward its shareholders while also enabling it to retain strategic flexibility.
But that dividend has been paid now. So, what's next for the Coles dividend? Let's see what analysts are forecasting for the supermarket giant.
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Coles dividend forecast
Interestingly, analysts actually expect the Coles dividend to be lower year on year in FY 2024 for the first time since its listing.
For example, Goldman Sachs is forecasting a fully franked dividend of 65 cents per share for the financial year.
Based on the current Coles share price of $16.07, this will mean a 4% dividend yield for investors.
Goldman then expects another dividend cut to 64 cents per share in FY 2025 due to softening profit margins. This would mean a dividend yield of just under 4% for investors that year.
The good news is that the broker believes that a return to growth will take place in FY 2026 thanks to a rebound in its profit margins.
Goldman is expecting the Coles dividend to come in at a fully franked 72 cents per share. This represents a 12.5% increase year on year and equates to an attractive 4.5% dividend yield.
Should you buy Coles shares?
Goldman is currently sitting on the fence when it comes to Coles shares.
The broker recently upgraded the retailer's shares to a neutral rating with a $16.30 price target. This is a touch higher than where they trade today.
The broker feels that the Coles share price is fairly valued at current levels. It said:
In our opinion, whilst COL has under-invested in its digital transformation and omni-channel strategy, we believe 1) COL has made encouraging steps to address under-investment with key Witron facilities now operating 2) whilst Ocado facilties have been delayed, risks of further delay are more limited. We expect COL to report lower comps sales and EBIT margin growth in FY25/26 vs key competitor WOW, though execution under new CEO has been increasingly positive. COL is trading below long term 12m forward P/E but with double running cost associated with Witron/Ocado facilities alongside existing infrastructure, we believe this is fair value. We are Neutral rated on COL.
