Could Coles Group Ltd (ASX: COL) be counted as a quality ASX dividend share?
As most readers would probably know, Coles is one of the largest supermarket businesses in Australia.
How good is the Coles dividend?
Coles hasn’t been its own separate entity for too long. It was split off from Wesfarmers Ltd (ASX: WES) at the end of 2018. There’s not much history to look at.
FY20 was a very disrupted year due to the COVID-19 effects. Coles decided to pay a total dividend per share of 57.5 cents. The only comparable growth was a 14.6% increase to the final dividend to 27.5 cents.
Based on the trailing 57.5 cents annual dividend, at the last traded Coles share price it has a fully franked dividend yield of 3.2%, or 4.6% including the franking credits. That’s a pretty solid yield in this era of ultra low interest rates.
In terms of defensive dividends, Coles is a solid option. We all need to eat after all. During that difficult COVID-19 lockdown period, Coles saw elevated levels of growth. Overall in FY20, Coles reported 6.9% growth of sales and 7.1% growth of net profit after tax (NPAT).
The COVID-19 growth will be hard to beat in the second half of FY21.
Strong growth in the FY21 first quarter
Coles said that it made a strong start to the 2021 financial year in the first 13 weeks. Total first quarter sales grew 10.5% with online supermarket business to customer sales increasing by 73%.
That growth should be good news for the FY21 first half profit and the dividend. A company’s board can only sustainably increase the dividend if it’s supported by profit growth.
Does the Coles valuation make sense?
Aside from these shorter term COVID-19 effects, I’m not sure that Coles is going to be growing by double digits. Its profit is linked to food inflation and population growth.
At the latest Coles share price it’s valued at 23 times the estimated earnings for the 2022 financial year, according to CommSec.
That looks pretty pricey in my opinion. There isn’t any international growth and I’m not sure where else Coles can generate earnings growth. However, compared just to cash then Coles is a decent option.
But there are plenty of other ASX dividend shares I’d rather buy such as Magellan Financial Group Ltd (ASX: MFG) and Brickworks Limited (ASX: BKW).
