Could the Coles Group Ltd (ASX: COL) share price be an opportunity for investment income?
Coles is one of the biggest businesses in the S&P/ASX 200 Index (ASX: XJO) with a market capitalisation of around $24 billion according to the ASX.
The ASX share runs a few different businesses. It has 800 full-service supermarkets around Australia. As well, Coles Express is one of Australia's leading fuel and convenience retailers, with 700 sites across Australia. Coles' liquor segment has 900 stores across different brands including Liquorland, Vintage Cellars, First Choice Liquor, and First Choice Liquor Market.
In the recent FY22 half-year result, Coles' board decided to pay an interim dividend per share of 33 cents. This was the same as the dividend the company paid in the prior corresponding period.
Is the Coles share price a buy?
The brokers at Macquarie think that the supermarket business is a buy, with a price target of $19.70. That implies a potential upside of around 10% over the next year.
Macquarie likes Coles in the consumer staples space. It thinks Coles is going to pay a grossed-up dividend yield of 4.9% in FY22 and 5.3% in FY23.
However, there are some complications and issues for Coles to work through including inflation from food suppliers, increased operational expenses, and difficulties with the supply chain.
How has the ASX share performed recently?
The FY22 half-year result showed that its financial numbers were almost flat.
Half-year sales revenue grew by 1% to $20.6 billion, while net profit after tax (NPAT) dropped 2% to $549 million. Profit changes can be a key influence on the Coles share price.
However, over two years, supermarket sales had grown by 8.6%, liquor sales went up 18.2%, and Coles Express sales had gone up 1.1%.
Coles said that its earnings had been impacted by higher COVID-19 disruption costs, related travel restrictions on Coles Express earnings, and transformation project costs.
However, 'smarter selling' benefits of more than $100 million were achieved in the first half of FY22. The company said that it's on track to deliver over $200 million of benefits in FY22.
The company is working on several ways to improve efficiencies and profitability. For example, it has introduced measures to reduce loss in-store through the use of artificial intelligence with dynamic markdowns.
E-commerce efficiency is benefiting through the introduction of an automated fraud detection tool to reduce loss and a continued focus on reducing costs to serve through improved picking efficiencies and delivery van optimisation.
The supermarket company's partnership with grocery technology player Ocado is expected to help with automated fulfilment, as well as last-mile solutions.
Coles share price valuation
According to Macquarie, the Coles share price is valued at 23x FY22's estimated earnings and 22x FY23's estimated earnings.
