Is the Coles share price a buy?

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

Coles has only recently been separated from Wesfarmers Ltd (ASX: WES), but it is already making some big moves of its own.

You may have seen that a week ago Coles announced it had entered into a joint venture with Australian Venue Co regarding Coles’ hotels business, Spirit Hotels.

The deal, which netted Coles $200 million, will see Australian Venue Co manage the day to day operations of Spirit Hotels and get the “economic benefit” whilst Coles manages the liquor stores attached to the hotels. Both businesses plan to help the joint venture grow in Queensland.

I thought was a very clever move, because it unlocks a lot of value for Coles and gets it out of a sector it’s not exactly an expert in. I imagine a lot of that money will be used to fund the two new automated ambient distribution centres from WITRON, which will cost approximately $950 million over six years.

Coles also recently announced a new partnership agreement with Viva Energy Group Ltd (ASX: VEA), which will hopefully revive the volume of fuel sales at Coles Express.

Management have been very busy in the early months of its standalone history. But, I’ve been impressed by each of the major announcements.

I think it’s only by making these big strategic moves that Coles might be able to deliver better profit growth and stronger returns than Woolworths Group Ltd (ASX: WOW).

There will soon be another major international competitor operating in Australia, along with Aldi, Costco and Amazon. Growing low-price competition is a major risk Coles and Woolworths over the long-term.

Foolish takeaway

At 17x FY19’s estimated earnings, I think Coles is trading at a decent price, particularly as it’s likely to pay a sizeable dividend yield from FY20 onwards. I would prefer Coles to the major banks as a dividend pick, as there is a smaller chance of a ‘wipeout’ from an economic dip.

Other ideas to go along with Coles in a defensive portfolio are these quality large cap ASX shares which have generated large returns over the past decade.

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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 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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