Coles Group Ltd (ASX: COL) shares are a popular investment on the ASX. Aside from being one of the most prominent businesses in Australia, Coles is also a common fixture of investors' portfolios, particularly those who invest for dividend income.
Holding Coles shares since their 2018 spinoff from Wesfarmers Ltd (ASX: WES) has been a successful endeavour. Coles stock has risen from the $12.49 they hit the ASX at back in late 2018 to the $18.12 they are currently asking (at the time of writing). That's a gain worth 41.2%.
That 41.2% doesn't account for Coles' significant dividend returns either. For most of the past six or so years, Coles shares have been yielding more than 4% per annum.
But today, we're not going to dwell on the past any longer. Instead, we're going to speculate on the future and discuss what Coles shares could be worth in ten years' time.
Predicting what will happen to any company's shares at any point in the future is a tricky task. The market doesn't always do things rationally. So even if we make accurate assumptions about Coles' financials, we cannot guarantee that these assumptions will translate into a particular share price, no matter how sound the logic is.
Despite this hurdle, we're going to give it a rudimentary shot though.
Image source: Getty Images
What will Coles shares be worth in 2034?
Let's start at the beginning. A company's share price is the function of two metrics. The first is how profitable it is, represented by the earnings per share (EPS) metric.
The second is how much investors are willing to pay for each dollar of earnings our company brings in.
For its 2024 financial year, Coles told us that it brought in 83.8 cents per share in EPS. Right now, the Coles share price is trading at $18.12. This means that investors are willing to pay $21.62 for every $1 of earnings Coles made over FY2024, giving the company a price-to-earnings (P/E) ratio of 21.62.
This ratio bounces around all of the time, meaningfully so if investors anticipate that the company's future earnings capacity is going to move up or down. But for now, let's assume that this ratio remains consistent over the coming years.
Over the four years preceding the 2024 financial year, Coles reported growing earnings in every single one. Its FY2020 EPS came in at 73.3 cents per share, which grew to 75.3 cents in FY2021, 78.8 cents in FY2022 and then to 82.3 cents by FY2023.
That's an average compounded annual growth rate of 2.71% per annum.
Let's now assume that Coles will continue to grow its earnings at this rate (which again is not a guarantee). If that is the case, the company can be estimated to bring in approximately $1.095 in EPS by the 2034 financial year.
If Coles does indeed hit that number by 2034, and its P/E ratio remains at 21.62, then we can estimate that the Coles share price will be trading at something around $23.64 in a decade's time.
Foolish takeaway
Now, I could well be wrong about that price projection. Investors could decide, whether in 2034 or at any other time over the coming decade, that Coles shares aren't worth an earnings multiple of 21.62. Coles might deliver higher (or lower) earnings growth than the 2.71% it has averaged over the past five years.
But, without a crystal ball, Coles at $23.64 by 2034 is probably just as good a guess as any right now.
