Are Coles shares a buy after falling 12% in 2 months?

Coles Group Ltd (ASX: COL) shares haven’t been having a good time of late.

Since 19 March 2020, the S&P/ASX 200 Index (ASX: JXO) has risen an extraordinary 21%. Over the same period, the Coles share price has fallen more than 12% from above $17 to where they sit today (at the time of writing) at $15.02.

Of course, from a year-to-date perspective, it’s a bit of a different story. Since the dawn of 2020 (which feels like a lifetime ago), the ASX 200 is still down 13.4%, whilst Coles shares have essentially been flat.

So what’s going on here? And more importantly, for investors, is the Coles share price a buy today?

Hot Coles or not?

The first thing to note is that Coles’ former parent company has been selling Coles shares like there’s no tomorrow. At the start of 2020, Wesfarmers Ltd (ASX: WES) owned a 15% stake in Coles – leftover from the demerger that occurred back in November 2018 (at around $12.80 a share).

Fast forward to today, and Wesfarmers has trimmed back its remaining stake in Coles to around 5%. Yes, Wesfarmers sold a ~5% chunk of its Coles stake in February this year, followed by another ~5% tranche in late March.

With Wesfarmers seeing no value in Coles, should investors take the hint?

These transactions don’t merit too much thought, in my view. Yes, Wesfarmers probably doesn’t see too much meaningful growth in Coles’ future. But that’s understandable, seeing as Coles is a very mature business with almost complete market saturation.

It was also an easy avenue for Wesfarmers to raise cash, seeing as the Coles share price held up extraordinarily well in the market crash we saw in March. And Wesfarmers is the kind of company that’s always looking for new pathways to invest down.

Are Coles shares a buy right now?

So here’s how I see Coles shares today: a defensive, mature company with a reasonably safe dividend. Nothing more, nothing less.

For investors who prioritise ASX dividend income, Coles remains a great option in my view. On current prices, Coles shares are offering a 2.78% dividend yield, which comes with full franking credits (giving it a grossed-up yield of 3.97%). If you identify with these goals, the Coles share price is in the buy zone right now, in my view.

But if you’re looking to substantially grow your wealth over years or even decades, Coles is probably not the best bet to make. There are a plethora of ASX shares out there that offer better growth prospects, so perhaps your cash is better served in something else.

More reading

• Will the Wesfarmers share price climb higher in 2020?
• 3 ASX blue chip shares to put into your retirement portfolio
• 3 ASX shares Warren Buffett couldn’t ignore today
• 1 key trait to look for with most top ASX growth shares
• 3 quality ASX dividend shares for income investors to buy today

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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