Coles ‘cash cow’ future

Dividend payout to shareholders

SUPERMARKET giant Coles will pay 80 to 90 per cent of profits to shareholders as a dividend following its spin-off from parent Wesfarmers.

Wesfarmers will keep a 15 per cent stake in Coles following November’s demerger and listing of the supermarket chain, and investors were yesterday told the business would follow a similar dividend strategy to its former parent.

Patersons director of Private Wealth Research Greg Galton called the strategy fair, considering the group’s improved financial performance under Wesfarmers’ ownership over the past 11 years.

“Clearly, Coles is a more cash-generative business now that will be able to spit out cash,” Mr Galton said.

“It will become more of a cash cow in Australian business.”

With investors concerned about future dividend payments from the big four banks and telco giant Telstra, Wesfarmers and rival Woolworths have been seen as a “flight to safety”, Mr Galton said.

However, Coles and Woolworths face increasing competition from discount supermarket chain Aldi, US giant Costco and the impending arrival of German hypermarket chain Kaufland.

There are also potential threats from online seller Amazon and German supermarket Lidl in the future, Mr Galton said.

Wesfarmers’ minority stake will give it one seat on the new board of Coles and it will also hold 50 per cent of loyalty program Flybuys.

Coles will have net debt of $2 billion, which will give it a strong credit rating and position the group as a pure food and liquor player in the Australian retail market, Wesfarmers managing director Rob Scott said on Monday.

Wesfarmers said it expected that dividends of the two businesses combined would be “broadly equivalent” to dividends that would have been paid had Wesfarmers not gone ahead with the demerger.

The demerger will be effected by a scheme of arrangement, under which eligible shareholders will receive one Coles share for every Wesfarmers share held.

James Graham will be chairman of the new entity, while David Cheesewright, Jacqueline Chow and Richard Freudenstein will be nonexecutive directors.

Former Metcash supermarkets boss Steven Cain will take over as Coles managing director from John Durkan as previously announced.