Why is top broker Citi tipping 17% upside for the Coles share price?

Here's why this broker is tipping Coles as a buy today…

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Key points

  • Coles shares have been strong performers on the ASX in recent years
  • The company has handily outperformed the ASX 200 since its 2018 listing
  • But this ASX broker reckons the good times will keep on rolling...

The Coles Group Ltd (ASX: COL) share price has been a steady performer on the ASX for many years now. Just take its performance recently.

At present, Coles shares have recorded a year-to-date loss of around 4% over 2022 thus far. In contrast, the S&P/ASX 200 Index (ASX: XJO) has lost a far more painful 9% over the same period.

This is despite the company delivering an earnings report last month that was less-than-enthusiastically embraced by investors, one could say.

Although Coles reported a 2% rise in total sales, and a 4.3% rise in net profits after tax (NPAT) to $1.05 billion, the company also recorded a 0.2% slip in earnings before interest and tax (EBIT). This was mainly due to increased costs, particularly those associated with COVID.

As my Fool colleague reported at the time, the Coles share price slipped by almost 10% between the release of these earnings on 22 August and the end of the month.

But even so, Coles shares have been a strong performer over a longer period of time.

The ASX 200 has recorded a loss of 6.5% over the past 12 months, while Coles shares have lost a much-improved 0.6%. Indeed, Coles shares have outperformed the ASX 200 ever since the company listed on the ASX in its own right back in November 2018.

Since that day, Coles shares have appreciated by a pleasing 34%, while the ASX 200 has put on 20% over the same period.

But, as any investor worth their salt knows, past performance is no guarantee of future success. So what might lie in store for Coles shares going forward?

Is the Coles share price a buy right now?

Well, one ASX broker still reckons this company is a red hot buy.

Earlier this week, my Fool colleague James covered the views of broker Citi. Citi currently rates the Coles share price as a buy. It has a 12-month share price target of $20.10 on the grocer at present. If realised, this would see a pleasing upside of around 17% from today's pricing.

Citi is eyeing off Coles thanks to a perceived advantage the company has in these times of elevated inflation. The broker reckons that "food inflation will benefit supermarkets significantly while operating costs should remain less than top line inflation, benefiting margins".

In addition, Citi is also expecting Coles' recent run of dividend increases to continue. It is pencilling in a fully franked 74 cents per share in dividends from Coles for FY23, and 79 cents per share for FY24.

No doubt Coles shareholders will be pleased to receive such a bullish outlook on the company's immediate future. But, as always, we shall have to wait and see what comes to pass.

At the current Coles share price, this ASX 200 blue chip share has a market capitalisation of $23 billion, with a dividend yield of 3.61%.

Motley Fool contributor Sebastian Bowen 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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