The Coles Group Ltd (ASX:COL) share price has performed strongly in 2019 and is up more than 19% for the year. With bond yields and interest rates at record lows, companies like Coles that offer secure, fully franked dividends come into high demand among income investors.
Here’s why Coles has the potential to become the best dividend and yield stock on the ASX.
Why is Coles a yield favourite?
Following its demerger from Wesfarmers Ltd (ASX:WES) late last year, Coles is set to make its first dividend payment. Although there is no hard figure as yet, Coles has committed to an 80–90% dividend payout ratio. It is estimated that, with the current share price, investors could expect a 4% fully franked dividend yield.
This signals that the company will be focused on slower growth and should sustain the dividend target, as long as retail pricing remains stable. Analysts expect that free cashflow will cover the dividend and relevant capital expenditures, ensuring that there is no drag on the balance sheet.
What’s the outlook for Coles?
Earlier this year, Coles reported lukewarm half-year results, with the company highlighting a 45th consecutive quarter of same-store food sales growth. Following its demerger with Wesfarmers, Coles has established a five-year turnaround plan with the aim of not cutting dividends, restoring profit growth and maintaining market share.
Coles forecasts that the company will return to profit growth in 2021 by slashing $1 billion in costs over four years and slowing the opening of new stores to focus on online and convenience avenues. Some analysts believe that this strategy will help Coles boost same-store growth and improve margins and earnings.
Recently, Coles held its inaugural strategy day, where the company highlighted the changing landscape of the Australian retail sector. Coles addressed the growing competition and shift from online retailers, changing consumer behaviours and the impact of automation and data technologies. Coles recently announced that the company had signed a deal with technology business Accenture in order streamline supply-chain efficiency.
Recently, analysts at Credit Suisse downgraded the Coles share price to an ‘underperform’ rating, with a $12 price target. Analysts cited that the downgrade was based on current valuations, after the Coles share price’s solid rise over the last few months. Although a broker’s note is not indicative of the long-term valuation of a company, it does indicate where institutional sentiment lies in the short-term.
Given its favourable dividend payout ratio, defensive qualities and cost-cutting plans, Coles could be an excellent long-term investment, although given it is trading near highs, it does feel as though the upside has already been priced in for the short-term. I think a more prudent strategy would be to wait for the share price to pull back to a better entry point before buying into the company.
Coles is scheduled to announce full-year results for the 2019 financial year on Thursday 22 August.
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.