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Is the Coles share price a buy?

Is the Coles Group Limited (ASX: COL) share price a buy after today’s September quarter market update?

Investors are voting with their money and saying yes, the share price is up 2.8% at the time of writing.

There were some good bits in the quarter report. Apparently Coles Express achieved its first quarter of positive comparable fuel volume growth in four years, which is a sign that there are more customers going through the service stations, leading to Express total sales growth of 3.1%.

Liquor growth continues with total sales growth of 3.5% to $726 million, partly helped by comparable sales growth of 0.7%.

In the key supermarket division, Coles experienced price inflation of 1.4%. Even after excluding tobacco and fresh it still saw price inflation of 0.2%. Meanwhile, Coles Online grew sales revenue by 23.5% with ‘Click & Collect’ the fastest growing channel. Own Brand sales revenue grew by 4.7% in the quarter.

Coles Supermarket total revenue increased by 1.6% with comparable sales growth of 0.1%. This led to overall first quarter sales increasing by 1.8% to $8.7 billion.

Is the Coles share price a buy?

Coles continues to promote its strategy of trying to offer the best own brand range whilst becoming the most sustainable supermarket.

At the current share price it’s trading at around 23x FY20’s estimated earnings. Is this a good price for a business that just grew total sales by 1.8%? Maybe it is in an environment where interest rates are at record lows, inflation is essentially non-existent and the economic landscape is difficult. However, Aldi, Costco and Kaufland all have growth plans for Australia which could stunt future Coles growth. . 

The best reason I can think of to buy Coles is for a defensive dividend, which is projected to be a grossed-up 5.3% yield for FY20 at the current share price.

But the prospective growth rate is too low for me to want to invest. Unless you’re retired, I think a lot of investors should be going for growth over income (particularly when you add taxation of dividends into the mix). 

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