The Coles Group Ltd (ASX: COL) share price is trading around $24.38, only slightly below its 52-week high of $24.59.
I can understand why investors have been willing to pay more for the supermarket giant. Coles offers defensive earnings, a growing dividend, and several opportunities to become a better retailer.
But does the current share price still represent good value?
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Why I like Coles shares
Coles sells products Australians need every week, regardless of whether the economy is booming or household budgets are under pressure.
That recurring demand gives the business a level of stability that many other retailers cannot match.
I also think Coles has become more than a simple supermarket story.
Its investment in automated distribution centres should help improve the movement of products through the supply chain, reduce manual handling, and support better availability in stores.
Online grocery shopping is another important opportunity. Customers increasingly expect to shop through an app, collect an order, or have groceries delivered at a convenient time. Coles has the store network, customer relationships, and scale to keep improving that experience.
Flybuys also gives the company valuable insight into how customers shop. Coles can use that information to personalise offers, encourage repeat visits, and make promotions more relevant.
Private-label products could support growth as well. They allow Coles to offer shoppers lower-priced alternatives while potentially earning stronger margins than it would on some branded products.
I think these investments can help the company grow earnings even if supermarket sales only increase gradually.
Is the valuation getting expensive?
According to CommSec consensus estimates, Coles is forecast to generate earnings per share of 90 cents in FY26, 96.6 cents in FY27, and $1.12 in FY28.
At a share price of $24.38, Coles shares trade on a PE ratio of approximately 27.1 times FY26 earnings, 25.2 times FY27 earnings, and 21.8 times FY28 earnings.
I would not describe those multiples as cheap for a supermarket business.
However, the valuation becomes easier to justify if Coles can deliver the expected earnings growth through improving efficiency, stronger online sales, and disciplined cost management.
The income outlook also adds something to the investment case.
CommSec consensus forecasts are for dividends per share of 75.5 cents in FY26, 82 cents in FY27, and 95.3 cents in FY28. Those estimates imply forward dividend yields of approximately 3.1%, 3.4%, and 3.9%, respectively.
What could go wrong?
Supermarkets may appear simple, but they operate on thin profit margins.
Higher wages, transport expenses, energy costs, and investment in lower prices can quickly place pressure on earnings. Coles also faces competition from Woolworths Group Ltd (ASX: WOW), Aldi, Costco (NASDAQ: COST), and independent retailers.
If earnings growth falls short of expectations, the current valuation could leave the shares vulnerable to a pullback.
Foolish takeaway
I think the Coles share price is starting to look expensive at around $24.38.
The business remains attractive, and I would still consider it a reasonable option for buy-and-hold investors who value defensive demand, dividends, and gradual earnings growth.
However, the share price is close to its 52-week high and already reflects a fair amount of optimism.
I would be more enthusiastic about buying after a pullback. A lower entry price would provide a better dividend yield and more room for the company's long-term progress to translate into attractive returns.
