At 20x earnings and a 4% yield, surely I can’t ignore this ASX 200 stock?

At 20x earnings and a 4% yield, surely I can't ignore this ASX 200 stock?

I reckon this blue chip stock is looking pretty cheap right now.

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 January 27, 2024 3:00 am AEDT

Investors love to use the price-to-earnings (P/E) ratio to value ASX 200 stocks. But the P/E ratio isn't an absolute indicator of whether an ASX 200 stock is cheap or not.

For example, I would be happy to pay a 20x earnings multiple for Lottery Corp Ltd (ASX: TLC) shares. But if ANZ Group Holdings Ltd (ASX: ANZ) shares were going with a P/E ratio of 20, I wouldn't buy them with free money.

Yet there's one ASX 200 stock that I think is currently in a sweet spot with its P/E ratio of 20. At this valuation, this stock also comes with a fully franked dividend yield of 4.2%.

I'm talking about Coles Group Ltd (ASX: COL).

Coles is a business we'd all be familiar with. The company is the second-largest grocer in Australia, with a market capitalisation of just over $21 billion.

Family having fun while shopping for groceries. — Image source: Getty Images

Is this ASX 200 stock cheap?

Just to be clear, I don't view Coles' 20x earnings multiple as bargain-basement cheap. But I do think it represents a decent and compelling value for an ASX 200 stock today.

Especially so considering its arch-rival consumer staple Woolworths Group Ltd (ASX: WOW) is currently 35% more expensive than Coles with its present multiple of around 27. That's with a much lower dividend yield of roughly 2.87%.

Think about what you are buying at this 20x earnings multiple. You are getting one of the most resilient businesses in Australia that all of us either have to shop at or visit a competitor in the same sector.

After all, we all need, not want, to buy the food, drinks and household essentials that Coles sells. That's regardless of whether the economy is booming or in recession or whether we have high or low inflation.

And Coles is often the cheapest, or at least second-cheapest, place you can obtain these consumer staples.

That makes this ASX 200 stock phenomenally strong and resilient, in my view.

This strength can be seen in Coles' dividend track record. Since hitting the ASX boards in its own right in late 2018, Coles has been able to raise its annual dividend every single year.

If you're looking for a healthy, reliable ASX 200 stock that pays out generous dividends, I think it's hard to go past Coles right now.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.