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Coles keeps Wesfarmers' dividend approach

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 the demerger and listing of the supermarket chain in November and investors were told on Monday the business would follow a similar dividend strategy to its former parent.

Patersons director of Private Wealth Research Greg Galton says the dividend strategy is fair, considering the group's improved financial performance under Wesfarmers's 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 told AAP.

"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" recently, 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.

"We're confident that we're setting Coles up for future success," Mr Scott told journalists in a briefing call.

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 non-executive directors.

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

The Perth-based conglomerate announced in March its plans to spin off Coles and list it on the ASX, initially planning to keep up to 20 per cent.

Deustche Bank analyst Michael Simotas said at the time the demerger was a positive move because it showed that Mr Scott, who took over the reins last year in November from Richard Goyder, was taking an "active approach" to portfolio management.

In May, Wesfarmers quit the UK hardware market after burning through almost $1.5 billion in two years following its disastrous purchase of the Homebase hardware chain.

Wesfarmers shares were down 58 cents, or 1.2 per cent, at $49.42 at 1532 AEST.

Austrlaian Associated PressBack to Breaking News

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