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Are Coles (ASX:COL) shares a must-buy for income investors?

The Coles Group Ltd (ASX:COL) share price could generate strong returns for investors over the next 12 months. Here’s why…
The post Are Coles (ASX:COL) shares a must-buy for income investors? appeared first on The Motley Fool Australia. –

A teacher in front of a classroom chalkboard filled with questionmarks, indicating share market uncertainty

If you’re wishing to supplement your income with some dividend-paying ASX shares, then you could certainly do a lot worse than Coles Group Ltd (ASX: COL).

The supermarket operator’s shares have come under pressure recently and are trading at an attractive level according to one leading broker.

Why is the Coles share price good value?

According to a recent note out of Goldman Sachs, its analysts have a buy rating and $20.70 price target on this supermarket giant’s shares.

Based on the latest Coles share price of $15.51, this implies potential upside of over 33% for its shares over the next 12 months.

The broker notes that the Coles share price has fallen heavily since the release of its half year results. It appears to believe this is a buying opportunity for investors.

That weakness has been caused by management’s soft guidance for the second half of FY 2021 due to cycling a period of elevated sales at the peak of the pandemic. However, Goldman Sachs isn’t concerned and was already expecting this.

It commented: “The slowdown seems to have alarmed the market as it also highlights the concerns for future sales as we begin to cycle the spike in sales experienced from March 2020 without the historical benefits of immigration, which has tended to support population growth and retail sales by ~1% on average per annum. We anticipated this in our prior note from July 2020 and already forecast such a headwind in our industry forecasts for COL and WOW over 2021. “

“While it will likely be difficult to grow top line sales growth in this environment, we expect profits to be modestly easier to maintain given elevated costs in the base and COL’s ongoing cost out program, “Smarter Selling” which is on track to deliver A$250mn in cost out this year,” it added.

Supply chain automation

Another reason the broker is positive on Coles is its focus on supply chain automation. This is expected to be a key driver of profit growth in the future.

It explained: “The key long-term theme for COL is the step change in efficiency the company will derive as it automates its supply chain with the Witron installations starting in SEQ and NSW. While this program will not begin to impact performance until FY24, management appear to be getting more confident about the benefits to longer-term competitiveness.”

What about dividends?

Goldman Sachs is forecasting fully franked dividends of 62 cents per share in FY 2021, 67 cents per share in FY 2022, and then 73 cents per share in FY 2023.

Based on the current Coles share price, this will mean yields of 4%, 4.3%, and 4.7%, respectively, over the next three years.

Combined with its potential share price gains, if Goldman Sachs is on the money, Coles shares could provide outsized returns for investors in the future.

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Returns As of 15th February 2021

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Are Coles (ASX:COL) shares a must-buy for income investors? appeared first on The Motley Fool Australia.

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