If you are looking for big returns for your investment portfolio, then it could be worth considering Coles Group Ltd (ASX: COL) shares.
That's the view of analysts at Bell Potter, which are tipping the supermarket giant as a top buy right now.
What is the broker saying?
According to a recent note, the broker thinks that "good things are happening" over at Coles. It commented:
Since FY20 COL has generated CAGR earnings growth of 3.7% p.a. while paying out 81% of cumulative profits in dividends, achieving 4.2% p.a. growth in dividends over that period. Looking forward, we anticipate delivery on business improvement initiatives (Simplify & Save) and delivery of targeted returns on recent capital initiatives to drive continued growth in earnings and dividends through to FY27e.
Bell Potter also highlights that there are multiple growth levers to FY 2027. The broker said:
On a normalised basis (for a 52wk period in FY24 & CFC/ADC implementation costs) we forecast +9.1% p.a. compound growth in earnings to FY27e, with this flowing through to growth in dividends with the capex peak being past.
This growth is expected to be driven by four key growth factors. It explains:
This view is predicated on four core growth pillars being: (1) Business improvement through the Simplify & Save program targeting $1Bn in gains by FY27e (with $238m delivered in FY24); (2) Normalisation in loss rates. Loss increased 20% YOY in FY23 and while a continued headwind though FY24, was demonstrating a reversal in 2H24 (+44bp margin tailwind YOY in 2H24); (3) Delivering targeted returns on a ~$1.45Bn capital investment program in ADC's and CFC's reducing costs and releasing store capacity; and (4) Expansion of the store network at a pace consistent with population growth.
Buy Coles shares for big returns
The note reveals that Bell Potter has a buy rating and $21.55 price target on the company's shares.
Based on its current share price of $17.77, this implies potential upside of 21% for Coles' shares over the next 12 months.
In addition, it is forecasting a dividend yield of approximately 4% in FY 2025, which boosts the total potential return to approximately 25%.
Bell Potter concludes:
While we see FY25e as a year of consolidation on a reported basis, we see COL as providing an attractive earnings growth profile through to FY27e on an underlying basis, with high levels of cash generation supporting growth in dividends. In addition, at 9.1x FY25e EBITDA, COL continues to reflect relative value compared to WOW (~5% discount).
