Coles Group Ltd (ASX: COL) is one of the larger S&P/ASX 200 Index (ASX: XJO) companies. It also has a growing reputation as an ASX dividend share.
The supermarket business has been steadily growing its dividend for investors since 2019.
I think that dividends are an attractive way for investors to benefit from the net profit after tax (NPAT) and cash flow generated by a business each year.
We don't know what Coles shares are going to do each year, but I think dividends can provide a relatively attractive and stable part of the returns.
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What was the latest Coles dividend?
Coles pays a dividend every six months to shareholders. Let's look at the last two dividends paid.
For the FY22 half-year result, Coles decided to pay an interim dividend of 33 cents per share, which was the same as the FY21 half-year interim dividend.
The final FY21 dividend per share was 28 cents per share. That represented an increase of around 2% compared to the FY20 final dividend.
Coles' trailing grossed-up dividend yield is 4.6% with the trailing 12 months of dividends amounting to 61 cents per share.
Will the dividend keep growing?
Rounded to the nearest cent, the estimate on CMC Markets is that Coles will pay an annual dividend per share of 62 cents per share. That would be a grossed-up dividend yield of 4.7% for FY22.
Further dividend growth is expected from the ASX 200 dividend share in FY23 and FY24.
Estimates on CMC Markets suggest an annual dividend per share of 67 cents in FY23 and 72 cents in FY24.
If these projections come true, then the current Coles share price offers a grossed-up dividend yield of 5% in FY23 and 5.4% in FY24.
Is the Coles share price an underrated opportunity?
Coles will soon reveal its FY22 result — it's due to report on 24 August.
But, the higher inflation environment could benefit Coles' earnings if it's able to pass on the higher cost of food to shoppers.
We haven't seen the numbers for the last quarter of FY22, but investors did see growth in the FY22 third quarter. Total sales for the business were up 3.9% to $9.3 billion. Supermarket sales were up 4.2% to $8.23 billion.
The company said that cost price inflation was impacting suppliers as a result of increased raw material, commodity, shipping, and fuel costs.
In its fourth-quarter update, Coles said (on 28 April 2022) that the fourth quarter to date had recorded a "solid" trading period with no COVID-19-related restrictions on traditional family events such as Easter. Coles said supplier input cost inflation was expected to continue into the fourth quarter and FY23.
It's hard to say how long food price inflation will remain elevated. I wouldn't say that the Coles share price is cheap at this level.
Citi is a broker that rates Coles as a buy, with a price target of $21 partly due to inflation and expectations of growing profit. Ord Minnett has a 'lighten' rating, with a price target of $17. That's a possible decline of around 10% due to a potential impact on consumer demand for the ASX 200 dividend share.
