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Why the Coles share price just hit a new record high

The Coles Group Ltd (ASX: COL) share price has hit a new record high today. The company’s shares started off the trading day at $18.85, just below the previous record high of $18.99. But the Coles share price shot the lights in the few hours after open and stormed past $19 to print a new record high of $19.16 just after midday. Since then, it seems to have cooled off somewhat and was going for $18.97 at the market’s close.

It’s been a topsy-turvy year for the ASX’s second-largest grocer. Between 1 January and 14 May, the Coles share price was essentially flat, despite the broader S&P/ASX 200 Index (ASX: XJO) going on a wild ride in the meantime, which included a ~35% plunge. But since 22 May, the Coles share price really took off, rising more than 26% as of today’s pricing.

It seems like an eternity ago that Coles was spun-off from its old parent company Wesfarmers Ltd (ASX: WES) for $12.49 back in November 2018. Given that any Wesfarmers shareholder who kept their issued Coles shares is now up around 52% in 18 months, it has to go down as one of the most successful spin-offs in recent times. Also, consider that Wesfarmers shares are up almost 50% on their own accord over the same period as well.

Why is the Coles share price hitting the roof?

There has been no major news out of the grocery giant this week, so we can probably put today’s new record high down to some good old-fashioned earnings expectations fever. Coles is due to report its full-year results on 18 August (next Tuesday). It will no doubt be reporting something of a mixed bag. It’s likely (in my opinion) that sales will still be up as a result of the coronavirus pandemic, not to mention the second lockdown that is unfortunately afflicting Victoria right now.

On the other hand, it’s also likely that the company will be carrying some extra costs associated with the pandemic, such as cleaning expenses, increased staff sick leave and in-store protective measures like cashier barriers.

Clearly, investors are betting that the former will outweigh the latter next week if today’s Coles share price is anything to go by.

Should you buy today?

Looking at the Coels share price right now, I don’t see much I like. I think the shares are fairly valued at best, if not a little expensive. With a price-to-earnings (P/E) ratio of 21.34 and a trailing dividend yield of 2.21%, I don’t see much upside from either a growth or income perspective.

Saying that, I recognise that the relative safety of Coles’ dividend is still attractive in a year that has been defined by dividend cuts. So if you want to add or top up your Coles shares within a diversified dividend portfolio, go for it.

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