How Coles shares could help ‘recession proof’ your portfolio

Happy couple doing grocery shopping together.Happy couple doing grocery shopping together.

Coles Group Ltd (ASX: COL) shares have strongly outperformed in 2023.

Since the opening bell on 3 January, shares in the S&P/ASX 200 Index (ASX: XJO) consumer staples retail stock are up 12%.

That’s more than twice the 5% year-to-date gains posted by the ASX 200.

And it doesn’t include the 36 cents per share fully franked dividend shareholders will have received on 30 March.

Now, here’s why investors concerned about a looming recession may want to run their slide rules over Coles shares.

Recession resilience

With its combined segments of Coles Supermarkets, Coles Express, and the Coles liquor division, the retail giant has a market cap of $24.6 billion.

And with the majority of its revenue derived from staple goods, Coles shares are well positioned to weather an economic downturn – or even a full-fledged recession – should stubbornly high inflation and rising interest rates send the Aussie economy into a tailspin.

After all, at the end of the day, we all need to eat and ensure our homes have the basic essentials.

For some idea of Coles shares’ defensive qualities, the company managed to post solid profits even during the height of the pandemic.

And the ASX 200 retailer’s latest half-year results revealed strong growth trends as Australia shakes off the last vestiges of those COVID times.

Among the highlights, Coles reported a 3.9% year-on-year increase in sales revenue, which reached $20.8 billion over the six months. And net profit after tax (NPAT) leapt 11.4% to $616 million.

The 36 cents per share interim dividend mentioned up top also represented a 9.1% increase from the prior corresponding half year. That continues the trend of Coles shares delivering an increased dividend every year since 2019.

Importantly, despite inflation running hot over the six-month reporting period, Coles’ gross profit margin increased by 0.43% to 26.5%.

The company also has a solid balance sheet.

Net assets as at 1 January were $3.38 billion, an increase of $370 million year on year. Net debt, meanwhile, decreased by $144 million. Net debt (excluding lease liabilities) at the half-year came in at $362 million.

What other recession resistant qualities do Coles shares have?

Another recession resistant aspect of Coles shares is the company’s ability to pass on any cost inflation to its customers.

Though management has noted it is seeing inflation pressures on its shelves begin to ease.

And, as The Australian reports, Coles is also working to lower costs via investments in automation.

This week, the retail giant unveiled its first automated distribution centre in Queensland. The centre will service 219 Coles supermarkets in Queensland and New South Wales.

Commenting on the investments in automation, outgoing Coles CEO Steven Cain said:

Modernising our operations is how we improve efficiency and availability in our stores and deliver higher service levels for our customers, team members and suppliers.

Our new automated distribution centres can process twice the number of cases and hold twice the number of pallets in half the footprint compared to our current distribution centres, leading to a more productive and sustainable business model.

Now no stock is likely to be wholly immune in the face of any lengthy recession down under.

But Coles shares have plenty of defensive qualities to help support their valuation through any upcoming economic downturns.

The post How Coles shares could help ‘recession proof’ your portfolio appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

from The Motley Fool Australia

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