Is this a compelling reason to buy Coles shares over Woolworths?

Coles vs. Woolies: This ASX broker has picked a winner.

Sebastian Bowen

Author Bio Sebastian Bowen has been a Motley Fool contributor since late 2018. Sebastian found his passion for writing and educating others about shares and all things finance after completing his studies in political, economic and social science and enjoys bringing this passion to life at the Fool. His investment philosophy is a simple one – buying high-quality companies at prices that make sense. When he’s not researching his next investment at all hours of the morning, Sebastian enjoys classic movies and likes to unwind with a good book, newspaper or record. Areas of Expertise Dividend investing ETFs Education Bachelor of Political, Economic, and Social Sciences (Government and International Relations), University of Sydney Social Media X/Twitter Favorite Investment Quote "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." – Benjamin Graham

Published May 20, 2023 8:30 am AEST

Ah, the great ASX debate: Coles Group Ltd (ASX: COL) shares versus Woolworths Group Ltd (ASX: WOW) shares.

Supermarket giants Coles and Woolworths are two of the most similar companies on the ASX. Both consumer staples stocks have been competing in the same market for customers and investors for decades.

Which is the better investment? That depends on who's being asked. Some investors prefer Woolworths' clear domination of the Australian grocery market. Others might like the cheaper Coles share price (on a price-to-earnings (P/E) basis) and the higher dividend yield.

But Coles may have an ace up its sleeve in 2023 that could help settle the debate.

Two couples race each other in supermarket trollies, having a great time, smiling and laughing. — Image source: Getty Images

ASX broker rates Coles shares as a buy today

As we covered earlier this week, ASX broker Citi recently came out with a highly bullish outlook on Coles. The broker gave the supermarket chain a buy rating, together with a 12-month share price target of $20.20.

The primary reason Citi sees so much potential for Coles is the company's new automated distribution centre (ADC) in Redbank, Queensland. Citi reportedly toured the new facility and reckons Coles is "moving in the right direction", with ADCs having "the potential to provide a cost advantage over competitors".

According to Coles:

The first ADC of its kind in Australia, it will revolutionise the way we get the products customers want, where and when they need them… The ADC will support less manual handling, more flexible rosters and greater opportunities to rotate through tasks.

The new ADC is one reason why Citi is forecasting Coles to increase its dividends to 69 cents per share for FY2023. Then to 73 cents for FY2024 and 80 cents for FY2025. Coles shares have paid out a total of 66 cents per share in fully-franked dividends over the past 12 months. That gives the Coles share price a dividend yield of 3.64% today.

Woolworths is also investing in automation technology for its supply chains. But it seems that Citi thinks Coles has the upper hand here.

The Coles share price has slightly outperformed that of Woolworths over the past five years, as you can see below:

But only time will tell if the next five years will bring the same outperformance for Coles investors.

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