Coles' Sales Reverting to Long-Term Trend Trajectory

Coles businesses are defensive in nature, with its cash flow largely from consumer staples which are relatively stable across the economic cycle. Coles also profits from negative working capital, allowing it to release capital as the business scales. The quality of these cash flows is high and with cash generation averaging over 100% in the five years to June 2020, we expect the dividend payout ratio to average over 80%. Coles' investment appeal as a defensive income stock is further underpinned by its strong balance sheet, manifested in investment-grade credit ratings from both Standard & Poor's and Moody's. Operating leases have an average lease expiry of around six years, providing the group with the flexibility to optimise its store network.