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Is the Coles share price a buy?

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

It might be telling that the Woolworths Group Ltd (ASX: WOW) share price is up around 0.8% today whilst the Coles share price is down 0.3%.

Earlier today, Woolworths announced that it is ending the $1 per litre milk pricing, with an increase to $1.10 per litre. There may be higher prices to come with Woolworths aiming to help dairy farmers whilst being mindful of customer budgets.

It is quite likely that Coles will soon announce an increase to its own milk pricing as well. Can’t let your rival have all the good PR, right?

Both Coles and Woolworths could benefit from price inflation. It’s hard to grow profit when you’re reducing prices every year. Reduced prices are good for consumers, but supermarkets have a habit of passing on the reduced revenue to suppliers.

Coles is targeting a number of different initiatives that could result in it growing profit quicker than population growth.

Most recently, Coles announced a trial with Uber Eats where Coles team members would pick orders which would then be delivered by Uber Eats drivers to customers who wanted a cheaper option than a takeaway shop’s offering. This may increase sales volume, but it would likely be at the cost of a reduced profit margin.

Coles is spending around $950 million over six years on two automates distribution centres from WITRON Australia.

Finally, Coles is looking to roll out a number of smaller-format Coles stores in high-density city locations which would allow locals to still do a full shop. At these locations there would be a wider range of convenience foods.

Foolish takeaway

Coles is trading at 19x FY19’s estimated earnings with an estimated grossed-up dividend yield of 6.3% for FY20.

Coles seems to be trading cheaper than Woolworths, so on that basis I think it is marginally the better choice, however I don’t think either of them are the best picks for growth or dividends due to increasing competition from Amazon, Aldi and Costco.

Instead of Coles or Woolworths, I’d much rather own one of these very attractive ASX winners.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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