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Is the Coles share price a buy?

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Is the Coles Group Limited (ASX: COL) share price a buy?

Some investors would say that Coles is a good option to consider in the current volatile share market.

Everyone needs to keep eating, so supermarkets like Coles and Woolworths Group Ltd (ASX: WOW) could be a good industry to consider. Coles’ liquor businesses should also be good – consumption of alcohol is pretty steady.

We haven’t yet heard much of the Coles growth strategy outside of Wesfarmers Ltd (ASX: WES). Two of the biggest initiatives are its supply chain modernisation plans and a smaller store format rollout.

Coles has entered into a Heads of Agreement with Witron, a market leader in the design and realisation of dynamic warehouse and order picking systems for distribution centres, with over 50 automated projects for major retailers around the world.

These new warehouses are expected to deliver significant productivity improvements over the medium term to long term. Coles’ net capital expenditure guidance for FY19 is between $600 million to $800 million. However, it expects to recognise provisions of $130 million to $150 million in FY19 for redundancies and lease exit costs for a number of existing distribution systems that will be closed over a 5-year period.

The smaller stores will be rolled-out in higher-density city areas where there’s normally not enough space for a full supermarket. With all the apartment buildings being built, more of Coles’ potential customers will be based in these higher-density areas. I think it’s a good strategy. Customers will still be able to do a full shop at these locations and there will be a good selection of convenience food.

Foolish takeaway

Wesfarmers management said that the combined dividend of the smaller Wesfarmers Ltd (ASX: WES) and Coles will be the same as what the combined Wesfarmers business would have been.

Coles could be a decent source of defensive dividends, but I think there are businesses with better growth prospects out there that are increasing their dividend payments every year.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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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