3 reasons why the Coles share price could be a buy

There are a few compelling reasons why the Coles Group Ltd (ASX:COL) share price is a buy, including its smarter selling strategy.

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businessman handing $100 note to another in supermarket aisle representing woolworths share price

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The Coles Group Ltd (ASX: COL) share price looks very compelling right now for a number of reasons.

Coles is the one of the biggest supermarket businesses in Australia along with Woolworths Group Ltd (ASX: WOW).

Why is the Coles share price a good one to think about?

Dividend yield

The supermarket industry is not a high-growth area. So, the dividend forms an important part of the returns.

Coles pays out an attractive amount of its profit each year as a dividend to investors.

At the current Coles share price, it offers a grossed-up dividend yield of 5.25%.

That dividend yield is after a solid increase to the FY21 half year dividend of 10% to 33 cents per share. That compares to the earnings per share (EPS) of 42 cents. Coles has an annual target dividend payout ratio of 80% to 90%.

Strong e-commerce sales

Whilst other ASX shares in the e-commerce space have captured more of the investor attention, like Redbubble Ltd (ASX: RBL) and Kogan.com Ltd (ASX: KGN), Coles has itself generated a lot of e-commerce growth.

In the FY21 half-year result it reported that e-commerce sales to household consumers went up by 61%. It has made strategic investments into the user experience and capacity, leading to significant improvements in ‘perfect order rate’ and customer satisfaction. E-commerce sales contributed $1 billion of sales revenue for the half.

Online is a category that Coles can continue to grow in over the long-term. Its online penetration is still relatively low but growing.

Smarter selling and improved offering

Coles is going through a bit of a transformation phase to be more efficient as a business and more attractive for customers.

In terms of costs, it’s looking like it’s on track to deliver cost savings of more than $250 million in FY21.

Coles is trying to improve its end to end flow of fresh goods to store with a more efficient supply chain providing greater shelf life for customers.

The supermarket business is looking to protect profit with “dynamic” markdowns (such as using artificial intelligence to optimise markdowns in meat) and loss prevention (such as entry gates and public view monitors).

One of the main things that it’s looking to improve is its own brand product range and market share. This can lead to lower costs for customers (and better loyalty) as well as better margins for Coles.

It’s also making progress on both of its Ocado and Witron automation projects.

What about the Coles share price valuation?

Coles is now cycling against the strong COVID sales of March and April a year ago in 2020. It recently reported its third quarter sales in FY21 were down 5.1% year on year. However, in the first four weeks of the fourth quarter, sales were up 4%.

The Coles share price went through a dip after reporting its FY21 half-year result. Thanks to that decline, the Coles share price is now valued at 22x FY21’s estimated earnings according to Commsec.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool Australia has recommended Kogan.com ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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