How did the Coles share price stay positive in June while the ASX 200 slumped?

Over a tumultuous month of trading for the ASX 200, the Coles share price is one of just a few to stay in the green.

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Happy woman looking for groceries. as she watches the Coles share price and Woolworths share price on her phone

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Key points

  • Coles is one of few ASX shares to remain in positive territory during the month of June
  • Coles is an ASX consumer staple stock and this is protecting its share price 
  • Top broker Citi is very positive on Coles with a 12-month share price target of $19.30 

The Coles Group Ltd (ASX: COL) share price is in the green today, up 0.06% to $17.88 at the time of writing.

Over a very tumultuous month of trading for the S&P/ASX 200 Index (ASX: XJO), Coles is one of few ASX shares to remain in positive territory.

The Coles share price is up 2.05% since the closing bell on 31 May. This compares to a 7.3% dip in the ASX 200.

What’s protecting the Coles share price?

Coles is part of the consumer staples group of ASX shares. Consumer staples are the goods and services we can’t live without — groceries, electricity, petrol — these sorts of things.

We’re going to buy these items no matter what is going on in the economy. That’s the protection that ASX shares in this space enjoy during volatile economic times.

As such, the S&P/ASX 200 Consumer Staples Index (ASX: XSJ) is also up 1.4% over the month. This compares to the S&P/ASX 200 Consumer Discretionary Index (ASX: XDJ) which is down 6.7%.

Consumer discretionaries are the goods and services we want and like but don’t need to survive.

Generally, when costs of living rise like they are now, due to rising inflation and interest rates, people tighten their belts. The first things to go out of their budgets are the little luxuries in life.

Brokers rate Coles a buy

As my Fool colleague James reported yesterday, top broker Citi is very positive on Coles and has a buy rating and $19.30 price target on the share.

Based on today’s Coles share price, that’s a potential upside of 7.9%.

While that’s not particularly exciting, it certainly puts Coles in safe haven territory while so many other ASX shares are tanking during the current market correction.

As James reported, Coles has a “strong market position, solid long-term growth prospects, and positive exposure to rising inflation”.

To clarify, the reason that Coles and other ASX consumer staples shares can manage inflationary pressures better than others is because they can raise their retail prices to offset the impact of higher business costs. After all, customers are unlikely not to buy household essentials because they cost a bit more.

Coles is also trying to cut costs through automation and enhanced efficiencies, which could boost earnings and margins and enable dividend growth over the next decade. That bodes well for the Coles share price, too.

U Ethical chief investment officer Jon Fernie told fellow Fool writer Tony Yoo that he likes Coles as a defensive play in today’s market.

Fernie said:

… Australian supermarkets are pretty well-placed in the current inflationary environment, so they are going to be impacted to an extent by rising costs. But they’re also able to pass on the higher food inflation to consumers. And I think again, if we have a weaker economic environment, that the company’s got a resilient earnings base. From a valuation perspective, [Coles] looks more attractive than their closest peer Woolworths Group Ltd (ASX: WOW).

Coles likely to deliver reliable dividends

Another reason to focus on ASX consumer staples when the market is rough is their usually reliable dividends.

These companies don’t face the same challenges in terms of sales and revenue as consumer discretionary businesses, so ASX investors can count on reasonable payouts.

Citi is forecasting that Coles will pay a dividend of 63 cents per share in FY22 and 72 cents in FY23.

As Coles dividends are fully franked, that means a grossed-up dividend yield of 5% and 5.75% respectively based on today’s share price.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET. 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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