This morning, Coles Group Ltd (ASX: COL) joined the long conga line of ASX companies reporting their FY2020 earnings.
Investors didn't seem to know what to think of the numbers, given the Coles share price rose after open before giving it all up… and then some. At the time of writing, Coles shares are down 1.37% to $18.67.
Coles did report some solid numbers, including revenue growth of 6.9% and net profit growth of 7.1% (you can read more about Coles' earnings here). But it was the dividend announcement that caught my eye.
Coles has built a reputation as a solid (if not impressive) dividend share since it was kicked out of its former parent company Wesfarmers Ltd's (ASX: WES) nest back in November 2018. It's been a welcome dividend share in many ASX income investors' portfolio in a year that has seen ASX bank dividends dry up and a bevvy of other former dividend heavyweights slash, defer and cancel their payouts.
So today, Coles announced a fully franked, final dividend of 27.5 cents per share, which is a 14.6% increase on last year's final dividend of 24 cents per share. With Coles' February interim dividend of 30 cents per share, Coles will pay 57.5 cents per share in dividends in 2020.
That gives the Coles share price a trailing dividend yield of 3.08% (or 4.4% grossed-up with full franking credits) at today's level.
Is the Coles share price a buy for dividends today?
A 3.08% dividend is nothing to sneeze at today, especially considering the lack of alternatives on the ASX right now and the record low interest rates investors are currently enjoying.
But how sustainable is this dividend? Well, Coles has an earnings policy when it comes to paying dividends, endeavouring to consistently pay out between 80-90% of its earnings as dividends. Based on Coles' basic earnings per share for FY2020 of 71.3 cents, paying out 57.5 cents gives Coles a payout ratio of 80.65%.
That to me indicates there is plenty of room for the Coles dividend to grow over time, especially if Coles can continue to grow earnings by around 7% per annum into the future.
Of course, that payout ratio target was made in a pre-COVID world. As such, it might be jettisoned if the coronavirus pandemic weighs on the company's costs in the months and years ahead. But on today's earnings report, I think there are good signs that Coles will continue to be a dividend heavyweight in 2021 and beyond.
