Chances are many ASX investors are taking a second look at Coles Group Ltd (ASX: COL) shares today. After all, the Coles share price has been in freefall for months now.
It was only back in April that this ASX 200 consumer staples stock and grocery giant was hitting new 52-week highs of close to $19 a share. But today, those same Coles shares are languishing at $15.60 each, down more than 16% from those April highs.
This minor fall from grace seems to have been sparked by Coles' full-year earnings report covering the 2023 financial year that we got a look at back in August.
Investors hit the panic button after Coles revealed that higher borrowing costs and wage bills, as well as increased rates of store theft, had put a big dent in its FY23 profits. That's despite Coles reporting underlying revenue growth of 5.9% to $40.5 billion for the financial year, as well as giving investors a 4.8% dividend boost.
So are Coles shares a buy today now that the company is back under $16 a share?
Well, let's discuss two things that I like about the Coles share price and one that I don't.
Coles shares: what's to like?
The first thing I think about Coles as an investment is its consumer staples nature. As a grocer and supermarket operator, Coles sells us food, drinks and household essentials. Those are things we need, not want, to buy. This inherently makes Coles a highly defensive share.
Most Coles customers will continue to shop at this company thanks to its low-cost advantage in selling life's basics. That's regardless of inflation or whether we enter a recession.
As such, Coles can be relied upon to perform well in almost all economic conditions. To illustrate, we saw this company raise its dividends over the COVID-ravaged years of 2020 and 2021, despite many other ASX blue chips being forced to cut shareholder payouts.
The second aspect of Coles that I like right now is its valuation. Put simply, Coles shares are looking pretty cheap right now. The company currently trades on a price-to-earnings (P/E) ratio of just 19.76. As we discussed this morning, that is a heck of a lot cheaper than the P/E ratio of 28.5 that its arch-rival Woolworths Group Ltd (ASX: WOW) is currently being valued at.
This share price discount allows Coles shares to trade on a much higher dividend yield than those of Woolies. Right now, you can expect a fully-franked dividend yield of 4.23% from Coles shares. In contrast, Woolworths shares trade on a fully-franked yield of 2.77%.
So we have a defensive, cheap, high-income investment. What's not to like about Coles then?
What's not to like about this ASX 200 stock?
At the end of the day, Woolies shares trade at a premium to Coles for a good reason: it is a superior business. We only have to look at market share data to see this in action. Back in May, we discussed the market share that Coles enjoys in the Australian grocery market compared to its rivals like Woolies.
Over the 2022 financial year, we found that Woolworths commanded 37.1% of the Australian grocery market, with Coles' share making up 27.9%.
This tells me that Woolies has a brand affinity with Australian consumers that Coles just can't match.
As such, if both companies were priced at the same earnings multiple today, the Fresh Food People would be my pick hands down. As the legendary Warren Buffett once said, "I would rather own a wonderful company at a fair price than a fair company at a wonderful price".
But Coles and Woolies don't trade at a comparable valuation. This probably explains why I currently own neither Coles nor Woolworths in my current portfolio.
