The Coles Group Ltd (ASX: COL) share price has wasted no time in retreating from its around $12.75 price tag at the time it split from Wesfarmers Ltd (ASX: WES).
What is Coles Group?
After 10 years being owned by Wesfarmers, Coles Group was split from the broader Wesfarmers conglomerate (which owns Bunnings Warehouse) in November 2018. However, the Coles name has operated in Australia for 100 years.
Today Coles is one of the largest retailers in the country, serving 21 million customers per week across its supermarkets, Coles Express, Online, Vintage Choice and others.
While serving 21 million customers sounds impressive the opportunity for investors needs to be carefully scrutinised.
2 Reasons Coles Group Shares Could Beat The Market
- Dividends. As a defensive business, Coles should be able to generate consistent dividends throughout a market cycle. Coles intends to pay between 80% and 90% of its profit as dividends to shareholders. Rival supermarket Woolworths Group Ltd (ASX: WOW) currently trades at a dividend yield of ~3%.
- Divestment focus. Divestments of smaller or underperforming business units tend to work out well for shareholders, according to some various studies and findings. One of the reasons for this argument might be that Coles’ new management team can focus on what’s right for their own business. However, success is far from guaranteed.
2 Reasons Coles Group Shares Might Be A Sell
- Disruption. A few years ago Wesfarmers’ managing director said the biggest threat to his business was Amazon.com Inc (NASDAQ: AMZN), the online retail giant. Perhaps ironically, Rask Media reported today that Amazon is offering Aussies cheaper-priced goods than both Coles and Woolworths.
- Growth. I find it hard to see where Coles can grow from here over the long-term with cutting at costs or closing stores and transitioning more sales to online. Of course, growth in share price is only one part of a shareholder’s total return.
What Now?
Looking at Coles and everything that has transpired in recent months, culminating in the ASX listing, I’m reminded that patience won’t lose me money.
Therefore, if I were to invest in Coles shares I would like to wait until the financials are cleaner and I can get a better picture of the dividend-paying potential. For me, I think revenue growth could be anaemic (compared to the companies I usually own) over the longer term, so most of the potential market-beating return will come from dividends and cost outs.
Wesfarmers & Coles Shareholders…
If I held both Wesfarmers and Coles shares I would be asking myself one important question:
- Would I buy shares in either of them if I didn’t own some already? If you wouldn’t, it might not make sense to keep your stake.
In my mind, the Bunnings Warehouse brand is the greatest asset of either company as its a near monopoly on home improvement. But given where we are in the cycle and share prices, I’m not prepared to say Wesfarmers shares are a standout buy today.
So in summary, I’m not a buyer of Coles shares at $12. But that could change at any time or — more specifically — any price!
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
