The pros and cons of buying Coles shares right now

Should investors put this stock in the shopping basket?

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Coles Group Ltd (ASX: COL) shares could be a smart buy today. There are several advantages and disadvantages to consider when weighing up whether to dive into the ASX supermarket stock right now. Let's take a closer look.

The Coles share price has experienced its fair share of ups and downs over the past year, as we can see from the chart above.

Which way is the market going to send the business next? Whilst we can't know what the company's share price will do in the short term, here's what I'm taking into account for the long term.

Positives

The company is delivering solid supermarket sales growth, stronger than that of arch-rival Woolworths Group Ltd (ASX: WOW). In the FY24 third quarter, Coles supermarkets saw sales growth of 5.1% to $9.06 billion. Including liquor sales and the sales to service station operator Viva Energy Group Ltd (ASX: VEA), Coles Group's total sales increased 3.4%.

Another positive is the impressive growth rate of e-commerce sales, which helped drive the overall numbers. The supermarket's e-commerce sales increased 34.9% to $856 million over the quarter.

In the early part of the fourth quarter, supermarket volumes remained "positive". Coles also reported having made "good progress" in addressing "loss" (theft), with efforts continuing in the fourth quarter. If Coles can keep improving on this front, that's good news for shareholders.

The opening of Coles' Kemps Creek automated distribution centre and its two customer fulfilment centres will "be yet another step" towards "improving operating efficiency" and differentiating its offer.

In terms of earnings, I like how defensive the supermarket's revenue is – we all need to eat! According to Commsec estimates, Coles is projected to generate earnings per share (EPS) of 81 cents in FY24 and 95.4 cents in FY26. That puts the current Coles share price at around 20x FY24's estimated earnings and 17x FY26's estimated earnings.

The dividend is yet another reason to consider buying Coles shares – the payout has increased every year since listing. Commsec numbers suggest a grossed-up dividend yield of 5.9% in FY24 and 7% in FY26.

Negatives to keep in mind about Coles shares

Coles is not exactly a high-growth ASX stock, so investors should be patient when it comes to capital growth and earnings growth. Furthermore, there's no guarantee that good sales growth will continue. Population growth is a useful tailwind, but it's not a given it will translate into earnings growth

Cost inflation is another factor investors should consider. Coles has already said its wages are increasing materially in FY24, and the new warehouses have higher costs (including depreciation).

The final negative factor for me is that Coles' debt levels have increased due to spending on the new warehouses. Some investors aren't fans of debt, particularly in an environment of high interest rates.

Foolish takeaway

Ultimately, I think Coles shares are a reasonable long-term buy right now, but there are some downsides to keep in mind. Steady earnings growth and a decent dividend yield could combine to deliver comparatively good overall returns.

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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