The pros and cons of buying Coles shares right now

Should investors put this stock in the shopping basket?

| More on:
A man looks a little perplexed as he holds his hand to his head as if thinking about something as he stands in the aisle of a supermarket.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Coles Group Ltd (ASX: COL) shares could be a smart buy today. There are several advantages and disadvantages to consider when weighing up whether to dive into the ASX supermarket stock right now. Let's take a closer look.

Created with Highcharts 11.4.3Coles Group PriceZoom1M3M6MYTD1Y5Y10YALL12 May 202312 May 2024Zoom ▾Jul '23Sep '23Nov '23Jan '24Mar '24May '24Jul '23Jul '23Oct '23Oct '23Jan '24Jan '24Apr '24Apr '24www.fool.com.au

The Coles share price has experienced its fair share of ups and downs over the past year, as we can see from the chart above.

Which way is the market going to send the business next? Whilst we can't know what the company's share price will do in the short term, here's what I'm taking into account for the long term.

Positives

The company is delivering solid supermarket sales growth, stronger than that of arch-rival Woolworths Group Ltd (ASX: WOW). In the FY24 third quarter, Coles supermarkets saw sales growth of 5.1% to $9.06 billion. Including liquor sales and the sales to service station operator Viva Energy Group Ltd (ASX: VEA), Coles Group's total sales increased 3.4%.

Another positive is the impressive growth rate of e-commerce sales, which helped drive the overall numbers. The supermarket's e-commerce sales increased 34.9% to $856 million over the quarter.

In the early part of the fourth quarter, supermarket volumes remained "positive". Coles also reported having made "good progress" in addressing "loss" (theft), with efforts continuing in the fourth quarter. If Coles can keep improving on this front, that's good news for shareholders.

The opening of Coles' Kemps Creek automated distribution centre and its two customer fulfilment centres will "be yet another step" towards "improving operating efficiency" and differentiating its offer.

In terms of earnings, I like how defensive the supermarket's revenue is – we all need to eat! According to Commsec estimates, Coles is projected to generate earnings per share (EPS) of 81 cents in FY24 and 95.4 cents in FY26. That puts the current Coles share price at around 20x FY24's estimated earnings and 17x FY26's estimated earnings.

The dividend is yet another reason to consider buying Coles shares – the payout has increased every year since listing. Commsec numbers suggest a grossed-up dividend yield of 5.9% in FY24 and 7% in FY26.

Negatives to keep in mind about Coles shares

Coles is not exactly a high-growth ASX stock, so investors should be patient when it comes to capital growth and earnings growth. Furthermore, there's no guarantee that good sales growth will continue. Population growth is a useful tailwind, but it's not a given it will translate into earnings growth

Cost inflation is another factor investors should consider. Coles has already said its wages are increasing materially in FY24, and the new warehouses have higher costs (including depreciation).

The final negative factor for me is that Coles' debt levels have increased due to spending on the new warehouses. Some investors aren't fans of debt, particularly in an environment of high interest rates.

Foolish takeaway

Ultimately, I think Coles shares are a reasonable long-term buy right now, but there are some downsides to keep in mind. Steady earnings growth and a decent dividend yield could combine to deliver comparatively good overall returns.

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.

More on Opinions

Person pretends to types on laptop drawn in sand.
Opinions

I sold one of my oldest ASX 200 shares last week. Here's why

Why would I sell one of my longest-held stocks?

Read more »

Broker analysing the share price.
Materials Shares

Buy, hold, or sell? Broker's verdict on 3 ASX 200 materials shares

Materials was one of four market sectors that weakened in overall value in FY25.

Read more »

A person sitting at a desk smiling and looking at a computer.
Technology Shares

3 ASX 200 tech shares to buy in July: Experts

The ASX tech sector delivered outstanding returns for investors in FY25.

Read more »

A group of executives sit in front of computer screens in a darkened room while a colleague stands giving a presentation with a share price graphic lit up on the wall
Opinions

2 ASX 200 large-cap shares that this fundie is cashing in after phenomenal growth

Shaw and Partners portfolio manager James Gerrish says he knows this will be an 'unpopular call'.

Read more »

Woman and man calculating a dividend yield.
Opinions

Buy or bail? Fundie's verdict on 2 ASX 300 shares

Stuart Bromley of Medallion Financial Group provides his insights.

Read more »

A woman sits in a quiet home nook with her laptop computer and a notepad and pen on the table next to her as she smiles at information on the screen.
Opinions

2 top ASX passive income stocks to buy with $5,000 today

I think these leading ASX passive income shares will keep delivering market beating yields in FY 2026.

Read more »

A black cat waiting to pounce on a mouse.
Opinions

ASX All Ords gold share jumps 28% in 7 days – but fundie says don't hold on

Niv Dagan of Peak Asset Management has a sell rating on this ASX All Ords gold stock.

Read more »

a man in a business suit sits at his laptop computer at his desk and smiles broadly in an office setting, giving an air of optimism and confidence.
Opinions

This ASX 200 share has made the most money for my portfolio. I'm expecting a lot more

There’s one key reason why I’m expecting strong growth from this stock.

Read more »