Is the Coles (ASX:COL) share price a buy for dividends?

Could Coles be a consideration for dividend income?

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At the current Coles Group Ltd (ASX: COL) share price it has a projected grossed-up dividend yield of around 5% for FY22.

What is the dividend projection for FY22?

The broker Morgans currently rates Coles as a buy with a price target of $19.80.

Morgans thinks that Coles is going to pay an annual FY22 dividend of $0.61 per share, after generating earnings per share (EPS) of $0.75. It’s that 61 cents per share dividend that translates to the 5% grossed-up yield.

The broker notes that the supermarket business has a good balance sheet that will help it invest for the future as well as continuing to pay out a high level of dividends. Morgans estimates that Coles will have a dividend payout ratio of 81.3% in FY22.

How is FY22 going?

Coles gave a trading update when it revealed its FY21 result.

It said that conditions in the early part of the first quarter were volatile. ‘Local shopping’ has returned with e-commerce and neighbourhood stores outperforming shopping centre and CBD locations.

Coles pointed out that it will be cycling against the sales and cost impacts of COVID-19 across all of its segments, particularly the extended lockdown in Victoria during most of the first half of FY21.

In the supermarkets division, which generates most of the profit, Coles said that the first seven weeks had seen sales rise 1% on a headline basis and 12% on a two-year basis because of the elevated sales due to COVID-19. The supermarkets performance is a key driver of the Coles share price. The e-commerce penetration was approximately 8% in the first quarter. In July, supermarkets incurred around $15 million of COVID-19 costs.

In liquor, sales in the first seven weeks of the first quarter remained strong, with headline growth being flat and approximately 19% growth on a two-year headline basis.

Coles has a strategy called ‘smarter selling’ to help the business become better and more efficient. These benefits are expected to be more than $200 million in FY22. Coles is expected to renew approximately 50 stores and to open approximately 20 stores in FY22.

Capital investment

Management said that FY22 will be significant year in both capital and operating expenditure terms as a result of its plan to invest in improving efficiencies and the customer experience.

For its two Witron distribution centres, Coles is expecting to invest a total of $950 million, of which $290 million will be in FY22.

Is the Coles share price an opportunity?

Morgans certainly thinks so. The buy rating and price target implies the Coles share price could rise more than 10% over the next 12 months.

Coles experienced operating leverage in FY21 as sales grew 3.1% and net profit increased 7.5%.

In FY23, the broker is expecting a slight dividend increase to an annual payment of $0.62. That would translate into a grossed-up dividend yield of 5%.

Should you invest $1,000 in Coles right now?

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET. 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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