Australia has an impressive array of food businesses. Some food-related businesses are regarded as sound defensive shares as people still have to eat no matter what the economic times. Supermarket shares can fall into this category.
Woolworths Group Ltd (ASX: WOW) is a major player in the sector. But, right now, there are a couple of food-related S&P/ASX 300 Index (ASX: XKO) shares that seem like better buys to me than Woolworths shares.
Let's be clear, Woolworths isn't a bad business but I think there are other businesses that seem better value. For starters, I'm going to talk about the company's main rival.
Coles Group Ltd (ASX: COL)
Woolworths owns retailer Big W, as well as a majority stake of the business that owns pet supplies retailer Petstock. Aside from that, the core Coles supermarket business is essentially the same as the Woolworths supermarket business in Australia.
Firstly, let's look at the valuations and dividend yields of the two businesses. According to estimates on Commsec, Woolworths shares are valued at 26 times FY24's estimated earnings and Coles shares are valued at 22 times FY24's estimated earnings. On an earnings multiple, Coles shares are materially priced cheaper than Woolworths.
The projected dividend yield that Coles might pay is also stronger than Woolworths. Commsec suggests Coles could pay a grossed-up dividend yield of 5.4% in FY24, while Woolworths could pay a grossed-up dividend yield of 4.2%.
I think Coles can keep growing its earnings beyond the food tailwind it's experiencing with Australia's population growth. This is largely thanks to its growing own-brand range and the large automated distribution centres the ASX 300 share is investing in.
Metcash Ltd (ASX: MTS)
Metcash is the business that supplies IGAs around the country. It also supplies a number of independent liquor retailers including Cellarbrations, The Bottle-O, IGA Liquor, Thirsty Camel, Big Bargain Bottleshop, Duncans, and Porters Liquor.
The company also has a hardware division with a number of different businesses including Mitre 10, Home Timber & Hardware, and Total Tools.
Looking at the company's earnings valuation, the ASX 300 share is priced a lot cheaper than the other supermarket businesses. According to Commsec, it's priced at just 13 times FY24's estimated earnings – that compares to 26 times for Woolworths.
The Metcash dividend yield is expected to be large in FY24 and beyond, thanks to its lower earnings valuation. According to Commsec, the business is projected to pay a grossed-up dividend yield of 7.7%. Getting that yield is appealing, even if there is some volatility in the short term.
I think the company can benefit in the long term from an improvement in its logistics and supply chain, as well as growing store networks for the businesses it supplies.
