The new year is just around the corner. What's the outlook for both the Coles Group Ltd (ASX: COL) share price and the dividend?
Coles has seen a mixture of challenges and successes since the start of the COVID-19 pandemic.
But despite COVID-19 now being two years old, the effects are still being felt across various parts of the economy.
How is the next 12 months looking for the supermarket business?
Current trading conditions
In the first quarter of FY22, which was the 13 weeks to 26 September 2021, Coles saw supermarket sales rise 1.8% year on year to $8.6 billion and total sales went up 1.5% to $9.76 billion.
Turning to the second quarter, the first four weeks showed comparable supermarket sales were broadly in-line with the first quarter and up approximately 8% on a two-year basis. These numbers are just helping the first half of FY22 though.
Coles was optimistic heading into Christmas, with consumer savings at an all-time high and the launch of a large range of entertaining options which the company said was good value. The supermarket business thinks it will see elevated sales as family and friends get together again.
COVID-19 costs were expected to peak in October and then start to moderate in November and December. Lower costs are expected in the second half.
Construction delays have impacted the capital expenditure program in the first half of FY22, so the business is shifting some of the capital program into FY23. In FY22, capital expenditure is now expected to be between $1.2 billion to $1.4 billion.
Coles is also facing Fair Work Ombudsman proceedings. It has incurred $13 million of remediation costs (including interest and superannuation) relating to some salaried team members, with a further $12 million provisioned in its most recent accounts.
Analyst thoughts on the Coles share price and dividend
The broker Citi thinks that Coles is a buy, with a price target of $19.60 for the next year. That implies a potential rise of just over 10%. Citi thinks it is going to take longer for things to get back to normal, which could benefit Coles.
On Citi's numbers, Coles has a FY22 grossed-up dividend yield of 5.3%. The Coles share price is valued at 22x FY22's estimated earnings.
Morgans also rates the business as a buy, with a price target of $19.90. This broker is expecting the supermarket business to pay a grossed-up dividend yield of 5% this financial year.
But not every analyst is positive on Coles.
UBS currently rates Coles as a sell, with a price target of $16.50. That suggests that Coles shares could fall by around 5% over the next year if the broker is right. The broker thinks that the supermarkets have seen the best of the demand conditions and that Woolworths Group Ltd (ASX: WOW) is/was achieving better results.
