Is the Coles (ASX:COL) share price a buy for the 5% dividend yield?

Are Coles shares worth owning for the dividend yield?

| More on:
a happy, smiling woman rides on the back of a trolley down the aisles of a supermarket.

Image source: Getty Images

Is the Coles Group Ltd (ASX: COL) share price worth looking at with a grossed-up dividend yield of around 5%?

Coles is one of the largest supermarket businesses in Australia, with over 800 supermarket locations. The business also has other segments including Coles Online, Coles Liquor, Coles Express, loyalty program Flybuys and Coles Financial Services.

The Coles Liquor business has over 900 stores across Liquorland, Vintage Cellars, First Choice Liquor and First Choice Liquor Market.

What is the Coles dividend yield right now?

In FY21, the Coles board decided to pay a total dividend of $0.61 per share. That was an increase of 6.1% compared to the total payment from FY20. This came after a 1.8% increase to the final dividend, bringing it to $0.28 per share.

Coles generated a total of 75.3 cents of earnings per share (EPS) in FY21. That means the supermarket business paid out around 81% of its FY21 profit to investors. This shows that Coles is keeping close to 20% of its net profit to re-invest back into the business.

At the current Coles share price, it has a trailing dividend yield of 4.9%.

Will the dividend grow in FY22?

The next 12 months of dividends may be similar to the last 12 months. Commsec numbers suggest a slight increase of the annual dividend to 61.4 cents per share.

Other analysts have similar thoughts. The brokers at Macquarie Group Ltd (ASX: MQG) think that Coles could pay an annual dividend per share of 61.2 cents.

Latest trading update

How a business performs with its sales can have a sizeable impact on profit and potentially the board’s thoughts on the dividend. Trading updates can also influence the Coles share price.

Coles recently gave an update for its first quarter numbers, showing sales generated in the 13 weeks from 28 June 2021 to 26 September 2021.

Supermarkets sales came to $8.62 billion, an increase of 1.8% year on year and 11.9% over two years. The online penetration of that was 9% for the quarter. Supermarket e-commerce sales grew by 48%.

Liquor sales were $874 million, which was up 2.6% compared to the first quarter of FY21 and up 20.4% compared to two years ago. Finally, Coles Express sales were $262 million, down 10.1% year on year and down 0.8% over two years.

The total sales for Coles were $9.756 billion for the first quarter, up 1.5% year on year and up 12.2% in two years.

Coles said that it’s on track to deliver ‘smarter selling’ benefits of more than $200 million in FY22.

The supermarket business is optimistic about the Christmas and the holiday period as families and friends get together again.

In the first four weeks of the second quarter of FY22, supermarket comparable sales were “broadly in-line” with the first quarter. Lower COVID-19 costs are expected in the second half of FY22, as changes to isolation policies lead to moderating impacts in November and December.

It also said that construction delays mean that some of its capital program will be re-phased into FY23.

Is the Coles share price a buy?

Macquarie thinks so, rating Coles as a buy, with a price target of $19.80. That suggests the brokers think that the shares can rise around 10% over the next 12 months. It’s valued at 23x FY22’s estimated earnings.

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

Before you consider Coles, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Coles wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

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 and Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Defensive Shares