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Why the Coles share price is at an all-time high

Sebastian Bowen
Ladder climbing to higher target

The Coles Group Ltd (ASX: COL) share price is at a new post-float all-time high today.

Coles shares opened at $17.19 this morning and soon after reached the new high watermark of $17.25 shortly after. At the time of writing, the Coles share price is consolidating just under this level and is going for $17.15 per share.

It’s been a phenomenal year for the newly spun-off supermarket chain. Coles was until November 2018 a part of Wesfarmers Ltd (ASX: WES), but was pushed out of its parent company’s nest to fly the ASX leader boards on its own. That it has been doing spectacularly – Coles floated around $12.40, which means that Wesfarmers shareholders who have stuck with their shares would be enjoying a near-40% gain (not even including dividends).

Why are Coles shares at all-time highs?

Well, general market sentiment is certainly helping. This week, the S&P/ASX 200 (INDEXASX: XJO) has shrugged off worries over the coronavirus and is making its way back up to the all-time highs we saw in late January.

But Coles is also benefiting from another market trend – the hunt for safe yield. Record low interest rates have meant that conservative investors who traditionally use instruments like term deposits and government bonds in their portfolios are being driven into the share market. This is in the search for returns higher than the paltry interest rates banks and debtors are paying these days. These kinds of investors are drawn to companies like Coles that offer defensive earnings bases that can support dividend payments through a future recession or downturn.

If you look at the share prices of similarly ‘defensive’ companies like Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD) and (of course) Woolworths Group Ltd (ASX: WOW) over the past two years, you can see a similar pattern.

Are Coles shares a buy at these levels?

On current prices, Coles is trading on an earnings multiple of 21.23. That’s slightly above the market average of around 19, but also much lower than some of the shares listed above. Woolworths, for instance, is currently trading on nearly 38 times earnings.

So if you’re desperate for this kind of safety, I think Coles is a good option – particularly when compared to Woolies and the others. However, I also don’t think it’s cheap by any means. I’m not attracted to Coles at the current level and I think there are better options elsewhere.

The post Why the Coles share price is at an all-time high appeared first on Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia owns shares of 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020