There are a few key reasons why Coles Group Ltd (ASX: COL) shares might be able to demonstrate a winning combination of a good dividend yield as well as capital growth.
The main two divisions of Coles are the supermarkets and the liquor earnings, which includes Liquorland, First Choice Liquor Market and Vintage Cellars.
Let's look at the two different areas of what could create a good 12 months (and beyond) for the company.
Growth
The business could see a double-digit return of the Coles share price, according to the broker Citi, as reported by my colleague James Mickleboro.
Citi currently has a price target on Coles shares of $20.20. A price target implies where a broker thinks the share price will be trading in 12 months. This price target implies a possible rise of around 11%.
The business is making good progress on its automated distribution centres, according to the broker, which it suggests reinforces the "view that Coles is moving in the right direction and the ADCs have the potential to provide a cost advantage over competitors." Coles is spending around $1 billion of capital expenditure on these facilities.
Even before those ADCs are operational and helping the company, Coles was reporting growing profit.
In the FY23 first-half result, it reported that sales grew by 3.9%, earnings before interest and tax (EBIT) rose by 9.9%, while net profit after tax (NPAT) climbed 11.4%.
The third quarter of FY23 showed good continuing operations sales growth of 6.6%, which could mean good growth up to the end of FY23. The start of the FY23 fourth quarter saw volumes "remaining modestly positive."
Coles dividends
Coles has grown its annual dividend per share for investors each year since 2019. There aren't too many S&P/ASX 200 Index (ASX: XJO) shares that kept increasing the dividend during the COVID-19 period.
Citi thinks that the dividends from Coles can keep increasing over the next few financial years.
In FY23 it could pay an annual dividend per share of 69 cents, which would be a grossed-up dividend yield of 5.4%.
Following that, the company might pay a total dividend per share of 73 cents in FY24, which would be a grossed-up dividend yield of 5.7%.
In FY25, Citi thinks that Coles shares might pay an annual dividend per share of 80 cents in FY25. This would translate into a grossed-up dividend yield of 6.25%.
Foolish takeaway
Coles shares could deliver a total return of more than 15% for shareholders over the next 12 months, if things go according to what Citi is expecting.
Some of the growth could be dependent on how inflation goes. But, the company can also benefit from Australia's growing population over time.
