Is the Coles Group Limited (ASX: COL) share price worth buying today?
Since the start of 2019 the Coles share price has risen by 15%, which is a solid performance by a defensive business.
Investors have been cheered by the supermarket company's sales performance and new strategy. In the third quarter of FY19 Coles' supermarket business grew sales by 3.2% with comparable sales growth of 2.4%. This isn't mind-blowing, but it is solid in such a low inflation world.
I like that Coles is heavily focusing on achieving better efficiency through technology investments and partnerships with Witron and Ocado. The new automated distribution warehouses will be very important to service the growing online sales.
There's only so much Coles can do to grow sales when it's against strong competitors like Woolworths Group Ltd (ASX: WOW), Aldi and Costco. It's things like the $1 billion of cumulative cost savings target by FY23 which could make a big difference to the bottom line over time, more than revenue growth.
However, Coles is planning to try to win market share on a few key points. It wants to be the most sustainable supermarket, which could attract certain shoppers, and it wants to increase its own brand sales, particularly in 'health'.
Is Coles worth a place in a portfolio? Its revenue and profit are likely to be less volatile than most other businesses, although the share price can still move up and down like any other. The Coles board said it will maintain an attractive dividend payout ratio, but I'm not expecting a lot of growth of the dividend over the years. I'd be pleased if it grows just a bit faster than inflation.
Foolish takeaway
Coles is trading at 21x FY20's estimated earnings with a projected grossed-up dividend yield of 5.6%. Whilst I'm pleased with the progress that Coles is making, I think the share price is too expensive for the amount of growth it's going to produce in the short to medium-term.
