Should you buy Coles or Woolworths shares?

Are Coles or Woolworths shares a better buy at current prices?

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Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) have long been loved by investors seeking stable, blue-chip dividend ASX shares. Although their famous duopoly over the Australian grocery market has weakened in recent years with the expansion of German supermarket Aldi, both companies are still formidable beasts. So which of these Australian institutions of retail represent the best 'buy' right now?

Woolworths

Founded in 1924, Woolworths is Australia's largest supermarket chain, with over 955 stores Australia-wide. The company also owns discount store chain Big W, alcohol retailers Dan Murphy's and BWS, and ALH Hotels, which operates over 300 pubs (mostly in Queensland). Woolworths has proved its brand's fortitude over the last few years in maintaining its market share of the grocery sector in the face of both Aldi's expansion and a resurgent Coles. Investors seem to recognise this, with the Woolworths share price currently hovering around $31, which represents a P/E ratio of just over 25.2, which is quite high for a consumer staples company in my opinion. Woolworths has a payout ratio of around 75%, which translates to a 3% dividend yield on current prices.

Coles

Coles has been around since 1914, but has been merged, demerged and reincarnated many times – most recently in November last year when then parent company Wesfarmers Ltd (ASX: WES) spun off Coles into its own ASX-listed company. Coles is trading for $12.40 at the time of writing (which is a tad below the price it was floated at) and this price represents a P/E ratio of just over 20. The 'new' Coles has yet to pay out its first dividend, but the company has flagged that the company will pay out between 80%-90% of its earnings, which will mean a dividend yield around 5% by my estimations. Although Woolworths has a slight edge on Coles when it comes to grocery sector market share, Coles is aggressively trialling new innovations, such as a $950 million investment in automating its supply networks and a renewed push with its Coles Express convenience stores.

Foolish Takeaway

Although both Woolworths and Coles are both blue-chip staples of the ASX, both companies' share prices are a little high in my opinion. I can't see massive capital growth for either stocks in the medium term as competition in the grocery sector is only going to intensify. The likely result of this will be price-cuts and squeezed margins. If I had to choose, my personal preference would be Woolworths – the company is more diversified and is re-investing more cash into its own business for the future. However, I think Coles is a better bet for income investors who can probably rely on a fat and rising dividend for some time.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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