I think Coles shares are a top ASX 200 buy for 2023

Supermarkets could be a defensive place to invest.

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Key points

  • Coles could demonstrate resilient earnings and growth in FY23 while paying a solid dividend
  • The 2023 financial year has started quite well, with sales growth
  • I like the strategy it’s following to grow earnings, including cutting costs and investing in automated distribution centres

Coles Group Ltd (ASX: COL) shares look like a solid S&P/ASX 200 Index (ASX: XJO) share in my opinion.

The Coles business has three different divisions – supermarkets, liquor and service stations. Some of the liquor brands include Liquorland, First Choice Liquor and Vintage Cellars.

Coles shares have seen a bit of pain, down around 10% over the past six months. With the defensive nature of supermarket earnings, I think it's a good idea to look at Coles in the economic environment.

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Resilient business model

We all need to eat, lots of people like to drink alcohol and a large amount of the population need to use a petrol station regularly. When you put that all together, it seems like Coles' earnings could hold up, even if there's a recession. Though, the business is looking to sell its petrol business to Viva Energy Group Ltd (ASX: VEA).

According to Commsec, in the 2023 financial year, the business is expected to generate 79.6 cents of earnings per share (EPS). Then, EPS could rise to 82 cents in FY24 according to Commsec.

In FY22, the company generated 78.8 cents of EPS, so the current projections show that earnings could rise slightly, despite all of the disruption to the economy with inflation and so on.

I think the update for the first quarter of FY23 showed this potential (slight) growth for FY23 in action, with total sales revenue growth of 1.3% to $9.89 billion.

Why I think the ASX 200 share looks like an opportunity

Despite the projection that the business is going to grow earnings over the next two years, the Coles share price is lower than earlier in the year, so investors can invest at a seemingly better value.

Using the estimates on Commsec, Coles is valued at 22 times FY23's projected earnings. Woolworths Group Ltd (ASX: WOW) shares are valued at 25 times FY23's projected earnings. Coles shares look a bit cheaper than its main competitor.

I think the ASX 200 share is doing a number of good things to grow profit in the future, including lowering its costs, launching more own brand products, investing in automated distribution warehouses and being a more sustainable business.

The dividend income could also provide a good boost to the total return in 2023 and beyond. It's expected, according to Commsec, to pay a grossed-up dividend yield of 5.4%.

While it may not generate a lot of growth, I think the business can achieve slow-and-steady progress, which could be enough to produce outperformance this year.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Coles Group. 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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