Better buy: Coles or Woolworths stock?

Which stock should go in the shopping basket?

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Both Coles Group Ltd (ASX: COL) stock and Woolworths Group Ltd (ASX: WOW) stock have been dependable over the last four years. With the COVID-19 boost gone and inflation moderating, which ASX share is a better buy?

I'm going to look at the three main areas that would help me decide.

P/E ratio

When two businesses are from the same industry, and they're both profitable, it can make a lot of sense to compare them based on their earnings multiple. This measure is called the price/earnings (P/E) ratio.

Usually, a lower P/E ratio is more appealing if the business is growing over the longer term.

But, it's more important to know about future earnings than the past. That's why forecasts are so useful. I wouldn't put too much weight on the exact number, but it can be a useful guide for which direction earnings are expected to go, and roughly what the valuation is.

According to the numbers on Commsec, Coles stock is valued at 21 times FY24's estimated earnings and 17.5 times FY26's estimated earnings. Coles' earnings per share (EPS) is predicted to grow by 19.6% between FY24 to FY26.

Woolworths stock is valued at 22.6 times FY24's estimated earnings and 20 times FY26's estimated earnings. Woolworths' EPS is projected to grow by 14% between FY24 to FY26.

There's not a huge amount in it, but Coles is valued more cheaply and it's projected to grow profit by more. The huge investment in new automated warehouses can help the business deliver efficiencies in the coming years once they're all completed.

Sales growth

Short-term sales performance is not the greatest indicator of future profit sales growth or future financial years, but it's a snapshot of which business is doing better.

Weaker, or stronger, sales growth than what was expected can influence both Coles stock and Woolworths stock.

In Coles' FY24 first-half result, it said supermarket sales grew by 4.9% to $19.8 billion. In the first eight weeks of the FY24 third quarter, supermarket sales had grown by another 4.9% "underpinned by volume growth".

In Woolworths' FY24 first-half result, it said its Australian food division saw 5.4% sales growth. However, Australian food sales in the first seven weeks of the second half of FY24 only grew by 1.5%.

Coles seems to be entering the second half with much better momentum, though that's not guaranteed to continue.

Dividend yield

Profit growth can influence the direction of the share price, but the dividends are the 'real' returns that shareholders receive until they decide to sell shares.

According to Commsec, Coles is projected to pay a grossed-up dividend yield of 5.6% in FY24 and 6.8% in FY26 at the current Coles stock price.

Woolworths is forecast to pay a grossed-up dividend yield of 4.7% in FY24 and 5.3% in FY26 at the current Woolworths stock price.

Foolish takeaway

Both of these are strong businesses, but Coles stock seems to win on each measure at the moment, so it would be my choice. However, I do appreciate that Woolworths has more diversification within its business, including Big W, Petstock and other relatively small businesses.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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