Whatever level at which the ASX is trading and however certain or uncertain the outlook for the economy, it is challenging to find stocks that offer a potent mix of income potential, growth prospects and a fair price. Certainly, it is possible to find one or perhaps two of these attributes, but finding all three of them in just one stock is very, very challenging.
For example, pharmaceutical company, CSL Limited (ASX: CSL), may be one of the most appealing growth opportunities around and offer excellent value for money, but its yield is very poor. In fact, with the company's share price having risen by 170% in the last five years, CSL yields just 1.6% at the present time. That's only slightly more than a third of the ASX's yield of 4.5% and is not only exceptionally low because CSL's share price has performed so well.
In fact, CSL is rather mean when it comes to shareholder payouts, with it having a payout ratio of just 42%. Certainly, it needs to reinvest in the business for future growth, but it appears as though its payout ratio could be significantly higher. For example, Telstra Corporation Ltd (ASX: TLS) pays out around 89% of its profit as a dividend and, despite its shares rising by 88% in the last five years, it still yields a whopping 4.8%.
However, where CSL has an edge over Telstra is with regard to its bottom line growth rate. For example, in the last ten years CSL has been able to post annualised growth in its bottom line of 21.4%, while for Telstra the figure is just 1%.
Of course, Telstra is set to improve on this moving forward, with its expansion into health care and into faster growing markets across Asia set to provide its net profit with a real boost. However, CSL is forecast to increase its earnings by 20.2% per annum over the next two years, while Telstra's bottom line is set to fall by 11.6% this year before rising by 10.1% next year.
Meanwhile, CSL offers excellent value for money, although its price to earnings (P/E) ratio of 23.1 may indicate otherwise. However, when combined with its growth rate, CSL's price to earnings growth (PEG) ratio of 1.15 has significant appeal while the ASX has a PEG ratio of 1.30. And, while Telstra's P/E of 18.5 is higher than the ASX's P/E ratio of 16.1, it still trades at a discount to the wider telecoms sector, which has a rating of 19.2.
So, while CSL's yield may be poor and Telstra's near-term growth rate may be somewhat disappointing, combining the two stocks offers a potent mix of income, growth and great value. As such, CSL and Telstra seem to be a perfect partnership that could not only reduce company-specific risk in your portfolio, but provide an excellent total return, too.
