This time last year, Coles Group Ltd [ASX:COL] was the talk of the town. Everyone was curious how their split from Wesfarmers would pan out.
Today, nearly one year after their landmark demerger, things are at least a little clearer.
After a few rocky months, Coles is now firmly on the up. They seem to have found their mojo and a clear path forward.
However, that doesn’t guarantee it will be smooth sailing from here on out.
The deal, the rally, and the pullback
At time of writing, Coles shares are down 1.8% for the day. Wiping out the small gain the supermarket chain had earned earlier this week.
In case you missed it, on Monday Coles announced a new deal with Sainsbury. The UK-based chain will be working with the local grocer to develop their personal brand.
Essentially, Coles will have the rights to bring some international goodies and sell them under their name. An offering that they will no doubt be hoping will attract more shoppers.
Whether it will be a masterstroke or a dud remains to be seen. We’ll have to wait and see what sort of range Coles decides to unveil.
For investors though, this is largely a triviality.
The bigger concern is the direction of Coles as a whole.
As it stands today, they seem to be positioning themselves as an income stock. An investment that is defensive and offers investors consistent returns on equity.
They don’t quite fit that bill right now though. Their final dividend for the past financial year was decent, but inflated. The 35.5 cent payout was boosted by an 11.5 cent special dividend.
Hiding behind this gift was a 9.1% slide in profit though. A result that just begs more questions.
For this reason, we wouldn’t really call Coles an income stock. At least, not a good one. For better examples of the kind of returns you should expect from serious dividend payers, read this.
If Coles wants to become a genuine dividend powerhouse, they need to lift their game. Which is exactly what management brought up in today’s AGM.
Solid start, uncertain future
My takeaway from the director’s speeches today is that Coles is hunting more growth.
Yes, they are highly profitable businesses already, but that isn’t enough. In order to remain competitive, they need to keep evolving.
How much evolving though, is the million dollar question.
Here is what Coles’ CEO, Steven Cain, had to say:
‘The 2019 financial year was indeed one of major change at Coles, and further significant change is on the way as we execute our refreshed strategy to become the most trusted retailer in Australia and grow long-term value for you, our shareholders.’
It would seem that Coles may have yet more uncertainty in its future. Not that that’s a bad thing.
The potential for further growth and bigger profits can’t be overlooked. But, that also brings with it more risk.
For some investors this may not be what they expected from Coles.
In the future, perhaps we can expect more stability. When or if that will happen, though, will depend on what this new change brings. Either positive or negative.
For Money Morning
PS: Grab a copy of Matt’s latest report and uncover his top FIVE dividend picks for 2019. Click here to download your free copy.