With the ASX close to all-time highs and fears surrounding the economy and the coronavirus, many investors may look towards non-cyclical or recession-proof stocks. And, since the demand for food will always remain strong, looking for an investment in the consumer staples industry is usually a favourite.
With that in mind, let's take a quick look and compare the two largest supermarkets here in Australia – Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL).
Coles and Woolworths at a glance
Looking at the largest companies by market capitalisation on the ASX, both Coles and Woolworths fall into the top 20. The ASX giants have market caps of around $22 billion and $53 billion respectively.
Woolworths Group consists of three core businesses: Australian Food, New Zealand Food and Endeavour Group. Its Australian Food business operates Australia's largest supermarket chain. This consists of around 1000 Woolworths stores across the country, and a financial services and insurance division.
The New Zealand Food business operates 181 Countdown stores (New Zealand's version of Woolworths), while the Endeavour Group is home to a variety of brands including Dan Murphy's, BWS, Cellarmasters, Langton's and ALH Group. The latter group, ALH, provides an array of hospitality venues including restaurants, cafes, gaming, nightclubs and accommodations.
Coles was spun-off from Wesfarmers Ltd (ASX: WES) in 2018 and listed as an independent public company. It operates a variety of businesses, with its largest being a chain of more than 800 supermarkets.
In addition to these, and similar to Woolworths, Coles also has a financial services division, Spirit Hotels and a portfolio of liquor outlets including First Choice Liquor, Liquor Land and Vintage Cellars. Other brands such as Bunnings, Officeworks, Target and Kmart remain subsidiaries of Wesfarmers after the demerger.
Revenue and growth
Woolworths
For the first quarter of 2020, Woolworths reported group sales of $15.9 billion, up 7.1% on 1Q19. The group's largest segment was Australian Food which grew sales at 7.8%, while total group online sales grew 37.4% to $802 million.
These numbers appear outstanding for a supermarket chain of this size. However, a different story is seen when we look further into the past. In fact, looking at the corresponding first quarter results for 2015, we note sales of $16.15 billion. As you can see, this actually implies growth of -1.5% over the past 5 years. In saying this, the Woolworths Group of 2015 isn't the same as the one we see today, with the closing down of Masters being one example.
Coles
Coles reported 2020 first quarter sales of $8.7 billion, which, based on comparable growth, was only 0.2% greater than 1Q19. Its supermarket segment achieved comparable sales growth of 0.1%, noting strong sales in the prior corresponding period.
In contrast, the liquor segment provided the largest growth with a 3.5% increase (0.7% comparable growth), underpinned by strong performance in First Choice Liquor. Looking back to 2015, we see a similar story with Wesfarmers' Coles division reporting sales of $9.2 billion, implying growth of -5.4% over this time.
Dividends
Woolworths has not failed to pay a dividend since starting in 1993. In fact, the group even continued to increase its dividend during the GFC. Woolworths pays a dividend twice a year and distributed $1.02 to shareholders over 2019, partially franked at 30%. At today's prices, this gives Woolworths shares a trailing yield of 2.43%, or 2.7% grossed up.
Since its demerger, Coles paid an inaugural dividend last September. This comprised of a final dividend of 24 cents and a special dividend of 11.5 cents, both of which were fully franked. The special dividend was paid to account for periods outside of the final dividend. If we were to forecast the final dividend forward, Coles sits on a net dividend yield of 2.91% which equates to 4.15% when grossed up.
Valuation
Lastly, let's take a quick look at a basic valuation metric for the two supermarket giants. Since both have reported largely similar growth over the past 5 years, I can't see why this should change substantially going forward. As such, we will look at the respective P/E ratios.
The P/E ratio compares the share price of a company to its earnings per share. Applying this to Coles and Woolworths, we get P/E ratios of 20.4 and 36.9. This, to me, appears to be quite a substantial difference for two similar companies sporting similar growth histories. It appears that the market may be expecting Woolworths to have a lot more growth ahead of it than Coles.
Foolish takeaway
While I have no plans to purchase either company, I do find it interesting how differently the market appears to be valuing the two companies. With Coles appearing better value, if I were to choose between them today, I would probably look closer at Coles for this reason.
