The Coles Group Ltd (ASX: COL) share price has not been a good show for investors of late. Although Coles shares were up 1.11% at the close of trading today, the company is still down more than 15% since mid-February.
That’s a hefty drop for an ASX blue chip in just 2 weeks. Coles shares are now down around 20% since making a new all-time high back in August.
So why are investors selling out of Coles of late?
Coles earnings disappoint
Well, the company’s half-year earnings report seems to be the reason. Coles did happen to deliver its earnings on 17 February, around the time investors started hitting the sell button on masse. On the surface, there really wasn’t a lot to dislike in this earnings report. Revenues were up 8%, earnings rose by 12.1% and net profits were up 14.5%.
But investors weren’t thrilled when Coles warned that, “sales in the supermarket sector may moderate significantly or even decline in the second half of FY21 and into FY22”.
Having said that, a bright spot for investors was Coles’ dividend. Management decided to bump up Coles’ interim shareholder payout by another 10% to 33 cents per share, fully franked.
That came on top of the grocer’s last final dividend of 27.5 cents per share (also fully franked). If we put those two dividends together, we get an annual payout of 60.5 cents per share. On the current Coles share price, that would give us a yield of 3.92%, or 5.6% grossed-up with the full franking.
That’s not a bad yield by current ASX blue-chip standards. But it looks especially good against Coles’ arch-rival Woolworths Group Ltd (ASX: WOW).
Grocery dividend wars
When Woolies reported its own earnings results on 24 February, it also announced a dividend increase for its interim payout. Shareholders will get a 53 cents per share interim dividend (full franked), up a nice 15% from last year’s 47 cents per share interim payout. If we take Woolworths’ new interim dividend with its last final dividend, we get an annual figure of $1.01 per share. On the current Woolworths share price, that would result in a yield of 2.51%, or 3.59% grossed-up.
Of course, you can probably blame the market itself here. On the current share prices, the market is pricing Woolworths at a more expensive level than Coles. Woolworths is right now boasting a price-to-earnings (P/E) ratio of 35.87. Coles, in contrast, is being priced with a P/E of just 19.69.
If Coles and Woolworths were being priced equally for the same dollar of earnings, the result would be dramatically different. But if its and buts were candy and nuts, we’d all have a merry Christmas, as the saying goes.
The fact is that right now, Coles is offering a grossed-up yield of 5.6%, whilst Woolies is putting forward 3.59%. And that’s the tea.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. 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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