Why I think Coles is a better ASX dividend share than Woolworths

Are Coles shares a better pick for dividends than Woolworths?

| More on:
Woman thinking in a supermarket.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Coles has a larger projected dividend yield than Woolworths
  • Woolworths cut its HY22 dividend, while Coles maintained its own payout
  • I think Coles is a better ASX dividend share, and it’s also valued at a lower multiple of future earnings

Coles Group Ltd (ASX: COL) is one of the larger businesses on the ASX. But is Coles or rival Woolworths Group Ltd (ASX: WOW) a better ASX dividend share?

Coles is the smaller business of the two. Coles has a market capitalisation of $25 billion, according to the ASX, while Woolworths has a market capitalisation of around $45.7 billion.

But it isn’t the size of the business that decides its dividend credentials.

Dividend yield

The size of the dividend yield can be an important factor for investors focused on income.

Different analysts have different expectations for the business and what dividends it might pay over the next couple of years.

Morgans thinks that Coles is going to pay a grossed-up dividend yield of 4.7% in FY22. In FY23, Morgans thinks the company will then pay a grossed-up dividend yield of 4.9%.

Meantime, the broker has estimated a grossed-up dividend yield of 3.3% for Woolworths in FY22. Morgans also projects dividend growth from Woolworths in FY23, forecasting a grossed-up dividend yield of 3.9% in FY23.

Coles has a materially higher dividend yield than Woolworths, according to Morgans’ projections.

Recent dividend growth

The most recent result from both of these businesses was the FY22 half-year result.

There wasn’t any growth from either of them but Coles, again, did better on the dividend front.

In the report for the first six months of FY22, Coles decided to maintain its interim dividend at 33 cents per share despite a slight reduction in its earnings per share (EPS).

Meanwhile, Woolworths declared an interim dividend of 39 cents per share. Woolworths said this was a 2.5% reduction after excluding Endeavour Group Ltd (ASX: EDV). Woolworths’ continuing operations (before significant items) EPS fell 5.1% to 64.3 cents.

In the most recent results, Coles provided shareholders with more dividend stability than Woolworths did.

Recent sales growth

One of the best ways that an ASX dividend share can most likely provide stability and growth of the dividend is by growing revenue and profit.

Both businesses recently released their third-quarter trading updates.

In its Australian food division, Woolworths reported sales growth of 5.4% to $11.4 billion. Whereas Coles supermarkets saw sales growth of 4.2% to $8.2 billion.

Total Woolworths continuing operations sales increased 9.7%, largely thanks to its business to business division. Coles’ total sales increased 3.9% to $9.3 billion.

In terms of sales growth, Woolworths did a little better than Coles.

Coles share price valuation

While the price-to-earnings (P/E ratio) isn’t everything, it can show which business is better value if they are similar businesses in terms of growth and/or quality.

According to Morgans, the Woolworths share price is valued at 32 times FY22’s estimated earnings and 27 times FY23’s estimated earnings.

Morgans’ estimates imply that the Coles share price is valued at 25 times FY22’s estimated earnings and 24 times FY23’s estimated earnings.

While Woolworths may have a claim to be a higher-quality business than Coles, I think the lower valuation makes up for it. The higher dividend yield and stability make me believe that Coles is the better ASX dividend share than Woolworths right now.

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 has positions in 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 Scott Phillips.

More on Consumer Staples & Discretionary Shares

Sports fans looking at smart phone representing surging pointsbet share price
Consumer Staples & Discretionary Shares

Up 15% this week, what’s going on with the Pointsbet share price?

It's been a good week to own Pointsbet shares.

Read more »

An older couple holding hands as they laugh while bouncing on a trampoline feeling happy that the Ardent Leisure share price is going up today
Consumer Staples & Discretionary Shares

Why is the Ardent Leisure share price jumping 9% today?

Ardent Leisure shareholders will be gearing up for a payday next month.

Read more »

A woman who used buy now, pay later receives her online shopping in the post only to find it's not what she wanted.
Consumer Staples & Discretionary Shares

Kogan shares slide 7% nearing a 52-week low

Kogan shares are falling today, but they are not alone in the sector.

Read more »

A woman looks unsure as she ladles mixture into a pan surrounded by small appliances
Consumer Staples & Discretionary Shares

Is the Breville share price out of the bargain bin?

The Breville share price is down 40% in 2022 -- but has gone up 5% in the past five trading…

Read more »

Happy woman looking for groceries. as she watches the Coles share price and Woolworths share price on her phone
Consumer Staples & Discretionary Shares

How did the Coles share price stay positive in June while the ASX 200 slumped?

Over a tumultuous month of trading for the ASX 200, the Coles share price is one of just a few…

Read more »

a man sits at his desk wearing a business shirt and tie and has a hearty laugh at something on his mobile phone.
Broker Notes

Top broker backs a tasty 20% upside for the Collins Foods share price

This ASX share could have plenty of upside ahead...

Read more »

Young girl drinking glass of milk
Consumer Staples & Discretionary Shares

Bubs share price drops despite new Target deal

The market continues to price in macroeconomic risks.

Read more »

Supermarket worker looks upset.
Broker Notes

Wesfarmers share price tumbles on broker downgrade

Wesfarmers shares are having a difficult day...

Read more »