Coles Group Ltd (ASX: COL) stock could deliver attractive total returns through a combination of share price growth and dividends.
The supermarket business has done very well since the start of COVID-19, but with pandemic effects now disappearing, the company is still managing to achieve good financial growth.
Experts think that the good times could continue for Coles shares.
Margins are rising amid inflation
It would be understandable that inflation would lead to higher revenue and profit for the business.
If Coles made a 5% profit margin, then it'd make a $5 profit on $100 of sales. If the same basket of products were sold for $105, then a profit margin of 5% would result in a $5.25 profit.
But, Coles' continuing operations sales grew 3.9% to $20.8 billion and the earnings before interest and tax (EBIT) grew 9.9% to $1.06 billion. Earnings per share (EPS) grew 11.6% to 46.3 cents. Clearly, margins have increased during this period.
The ABC reported on comments from Coles' government and industry relations manager, Vittoria Bon, about the increased profit margins when talking to the Senate Committee who commented that the supermarket had cut produces on some products:
That's why we've got the campaigns that we have, [such as] Dropped and Locked.
We've got 5,000 products at any point in time that represent value for our customers because they're on special…and we have a whole range of products that customers can buy that are less than $1, for example canned tuna, canned vegetables.
We're very conscious of the cost of living pressures faced by our customers, and that's why we're responding with those sorts of value campaigns.
The ABC also reported that Coles denied it was "profiteering from inflation", saying that it was because of a fall in COVID costs.
However, Coles did report that its gross profit margin improved by 43 basis points (0.43%) to 26.5% over the period. The EBIT margin increased by 28 basis points to 5.3%.
The Betashares chief economist David Bassanese said:
We need to eat, and that doesn't change all that much, and so we're not that price sensitive.
We hate paying more for Vegemite and peanut butter, but ultimately we're still going to buy it even at higher prices.
So what we've seen is businesses in those cases have been able to pass on the cost increase to prices, and sales in the main have been maintained.
Expert views on Coles stock and the dividend
As noted by my colleague James Mickleboro, Citi thinks Coles stock is a buy, with a price target of $20.20. That suggests that the Coles share price could rise by more than 10%.
The broker suggests that the FY23 first-half EBIT was better than expected and there is "upside" to the FY23 estimated consensus for EBIT.
Citi expects Coles to pay an annual dividend per share of 69 cents in FY23, which is a grossed-up dividend yield of 5.5%. The FY24 dividend per share could be 71 cents, which would be a grossed-up dividend yield of 5.7%.
