Want 17% upside plus dividend income? Broker says buy Coles shares

Is it time to buy this supermarket giant's shares?

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Coles Group Ltd (ASX: COL) shares are on course to end the week in the red.

In afternoon trade, the supermarket giant's shares are down 1% to $16.68.

This means the Coles share price is now down 10% over the last six months, as you can see below.

A man sits in a shopping trolley and shouts buy through a megaphone.

Image source: Getty Images

Should you buy Coles shares?

One leading broker that thinks investors should be buying Coles shares is Morgans.

According to a recent note, its analysts have an add rating and $19.50 price target on its shares.

This suggests that the supermarket operator's shares could rise by 17% if everything goes to plan.

But the returns won't stop there. Coles has a divided policy that aims to pay out up to 90% of its earnings to shareholders each year.

Morgans expects this to result in a fully franked dividend of 64 cents per share being paid to shareholders in FY 2023. This equates to an attractive 3.8% dividend yield at current prices.

Why is it positive?

Morgans is positive on the company for a number of reasons. This includes its attractive valuation, defensive qualities, and strong balance sheet.

The broker also expects a reversion in consumer shopping habits to be a positive for the retailer. It explained:

Trading on 20.6x FY23F PE and 4.0% yield, we continue to see COL as offering good value with the company's solid balance sheet and defensive characteristics putting it in a good position to navigate through a weaker economic environment. The unwinding of local shopping should also help further market share gains.

All in all, Morgans appears to believe that Coles shares could be a top option for investors looking for defensive blue chips.

Motley Fool contributor James Mickleboro 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 Coles Group. 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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