Could Coles Group Ltd (ASX: COL) shares be the most defensive option on the ASX to consider?
As most readers would know, Coles is one of the biggest supermarket businesses in Australia, it has an online offering too. Coles Liquor is another major segment which includes 900 stores under various brands like First Choice Liquor, Liquorland and Vintage Cellars. The other divisions of the business are: Coles Express, Flybuys (which Coles owns 50% of) and Coles Financial Services which offers things like credit cards.
Is Coles a really defensive business?
Supermarkets are pretty defensive in normal times. We all need to eat food, and a supermarket is one of the cheapest, efficient and best value places to do it. Coles has a national supermarket network which is conveniently accessible for most of the residents in Australian cities – there’s probably one within 10 to 15 minutes of your home.
But it was during the worst of the COVID-19 pandemic that the strength of the Coles business really shined through. In FY20 Coles supermarket comparable sales increased by 7.1% in the fourth quarter whilst liquor comparable sales went up by 20.2%.
Overall, FY20 revenue went up by 6.9%, EBIT (EBIT explained) rose by 4.7% to $1.39 billion and net profit after tax (NPAT) rose by 7.1% to $951 million.
You’d be mistaken if you thought the growth stopped on 30 June 2020. In the first quarter of FY21, Supermarkets saw sales growth of 9.8% of $8.46 billion, with online sales growth of 57%. Liquor saw sales growth of 17.4% to $852 million with online sales growth of 80%. . Express convenience sales rose by 10.3% to $291 million.
So it clearly has demonstrated growth credentials during one of the most difficult times since 1900. The ability for customers to order online has clearly been very useful for both Coles and the customer.
What about the dividend?
Coles grew its final dividend by 14.6%, bringing the final dividend to 57.5 cents per share. At the current Coles share price that means Coles has a dividend yield of 4.5% when you include the franking credits. As long as the Coles profit is stable, or even better growing, then the dividend can be stable.
Summary thoughts
Coles is a defensive business, there is no doubt of that. I’d much rather own Coles shares than have cash in the bank for a long time. But other the long term it’s growth that delivers the strongest results from the share market. So I think there are better businesses like Brickworks Limited (ASX: BKW) or Pushpay Holdings Ltd (ASX: PPH) to buy first before Coles. As a defensive business, the Coles share price is riding high as investors seek ‘safe’ returns.
