Coles Group Ltd (ASX: COL) stock represents one of the largest companies on the ASX, with a market capitalisation of around $22 billion. But there's more to the supermarket giant's investment case than that it simply sells food and drink staples.
Don't get me wrong, being a defensive ASX share is one of the main reasons to like the business. The fact that the Coles share price has risen 33% over the past five years (see below) – through all the difficult times – is a sign of its ability to perform over time.
In my view, there are some underrated reasons why Coles stock can make a good investment right now, including the following three.
Excellent dividend record
Many variables outside the company help decide what happens with the Coles share price. However, the board of directors has a lot of decision-making power regarding shareholder payouts.
And many retirees may be counting on Coles to deliver a resilient form of passive income.
The supermarket business has grown its annual dividend every year since it was separated from Wesfarmers Ltd (ASX: WES) in late 2018.
There's a chance it may maintain its annual dividend in FY24, seeing as the HY24 dividend was maintained, but having a record of no cuts is admirable for people wanting income stability.
If it does pay 66 cents per share for FY24, that's a grossed-up dividend yield of around 5.75%.
The estimates on Commsec suggest it could pay a grossed-up dividend yield of 6.1% in FY25 and 7% in FY26.
Outperforming Woolworths Group Ltd (ASX: WOW)
Coles' main rival is Woolworths Group Ltd (ASX: WOW). Knowing how each of them is performing and who is taking market share can be very useful.
Over the last several years, Woolworths has won most performance metrics, but the latest numbers show that Coles may be winning the battle to offer customers more choices, more sustainability, and perhaps better value. For whatever reason, Coles' recent trading update was stronger than Woolworths'.
When Coles reported its FY24 first-half result, it revealed that in the first eight weeks of the third quarter, its supermarket sales revenue grew by 4.9%, underpinned by "volume growth from strong execution" of its "value campaigns and improvements in availability compared to this time last year."
The Woolworths update said its Woolworths food retail sales increased 1.5% for the first seven weeks of the second half of FY24, and it was impacted by "a further moderation in inflation and lower item growth".
The significant outperformance could help Coles stock in the coming periods if outperformance can continue compared to Woolworths.
Strong e-commerce performance
The world is becoming increasingly digital and Coles is doing a great job of tapping into that trend.
In the first half of FY24, Coles' e-commerce sales increased by 29.2% to $1.8 billion (with a 33.5% rise in the second quarter), resulting in e-commerce penetration of 9.1% of the total sales. Woolworths' e-commerce sales increased 21.3%.
Coles attributed the strong online sales growth to a strong performance in seasonal events, particularly Christmas and Black Friday, improvements in availability, enhancements to the customer experience and continued network expansion.
A range of artificial intelligence and technology automotive initiatives were also successfully implemented in customer call centres, while pick optimisation initiatives improved efficiency, according to Coles.
Coles stock valuation snapshot
According to the estimates on Commsec, Coles stock is valued at less than 21x FY24's estimated earnings and at around 17x FY26's estimated earnings.
