The Coles Group Ltd (ASX: COL) share price has been having a pretty fantastic month so far and is up over 7% from this time last month. Coles shares hit a post-float high last week, reaching $14.04 soon after opening on Thursday. They have since dipped back down, opening lower this morning at $13.40 and they are now trading at $13.05 (at the time of writing).
A refresher on Coles
Coles is the second-largest chain of grocery stores in Australia, behind arch-rival Woolworths Group Ltd (ASX: WOW). Coles was spun off from former parent company Wesfarmers Ltd (ASX: WES) in November last year and now stands on the ASX on its own two feet, with a market capitalisation of $17.63 billion. Interestingly, Coles was floated at $12.49 and has both been above and below that price almost evenly ever since. Wesfarmers continues to own a 15% stake in Coles Group going forward.
The Coles umbrella includes around 806 Coles supermarkets around the country, as well as 712 Coles Express stores (usually attached to Shell petrol stations). Coles also owns 894 liquor stores, under brand names like Liquorland, Vintage Cellars and First Choice Liquor.
Coles is a lot more concentrated than Woolworths as a company. You can see from the above that Coles is almost entirely concentrated in the food and beverage sector, whereas Woolworths owns discount department store chain Big W and pub group ALH Hotels, in addition to its food and drinks businesses (no one mention Masters).
What does the future look like?
Going forward, Coles CEO Steven Cain is focusing on building the Coles brand around an expanded low-cost home-brand offering and offering cheap grocery prices overall. This combines with a four-year, $1 billion savings plan focusing on supply automation and staff cuts, which should give Coles plenty of firepower in the dividend department as well. Coles has yet to pay a dividend, but has stated that they are looking to payout 80–90% of earnings as dividends going forward. This would translate (by my humble calculations) to a yield of between 4–5% before franking when the first dividend is paid in September.
Foolish takeaway
Coles is shaping up to be a strong and defensive dividend income stock going forward. On today's prices, Coles is looking a tad on the expensive side (in my opinion) but if you're willing to pay a slight premium for a defensive income stock, you could do a lot worse! I wouldn't expect huge growth for Coles going forward, but if you're an income investor, Coles is a great option to look at.
