While lower interest rates are good news for the banking sector, stocks such as Commonwealth Bank of Australia (ASX: CBA) are hardly setting the world alight with their growth forecasts. Certainly, CBA is a great stock to own but, over the next two years, is forecast to increase its bottom line by just 4.9% per annum.
This is rather disappointing, since it seems clear that the RBA is focused upon imposing an increasingly loose monetary policy, which should be good news for the banking sector. In fact, it is likely to improve demand for new loans and make existing loans far more affordable due to less onerous interest costs. As such, an upgrade to CBA's current guidance cannot be ruled out.
However, financial services peer, AMP Limited (ASX: AMP), offers far superior growth prospects, with its bottom line expected to rise by 32% in the current year, followed by almost 9% next year. That's a superb rate of growth and AMP trades at only a small premium to its sector. In fact, the insurance sector to which AMP belongs has a price to earnings (P/E) ratio of 18.1, while AMP's rating is 18.2. And, while this is higher than CBA's P/E ratio of 15.5, when AMP's superior growth rate is combined with its P/E ratio, it equates to a price to earnings growth (PEG) ratio of just 0.9, versus 3.2 for CBA.
Of course, both CBA and AMP remain excellent income plays, with them offering yields of 4.7% and 4.5% respectively. However, at least partly as a result of its higher growth rate, AMP is expected to increase its shareholder payouts by 54% per annum during the next two years. This puts it on a forward yield (using 2016's forecast dividend payments) of 5.2%, which is higher than CBA's forward yield of 5%. As such, AMP appears to have more appealing income prospects for 2016 and beyond.
Clearly, AMP is a more volatile investment than CBA, as evidenced by its beta of 1.66 versus 0.79 for CBA. However, if interest rates do fall and the ASX gains a boost, then this could work to AMP's advantage, with its shares likely to respond more positively to a rising ASX than those of CBA. Moreover, for long term investors, a degree of volatility in a company's share price is unlikely to cause alarm – especially if, as is the case with AMP, its financial performance is strong.
So, while CBA offers a great yield, modest growth prospects and a valuation that could move upwards in response to an increasingly loose monetary policy, I believe that AMP is a better buy. Not only does it offer more bang for your buck in terms of a lower PEG ratio, it has a great yield and higher dividend growth prospects. And, while a more volatile shareholder experience is likely to lie ahead, its capital gains could continue to outstrip those of CBA – just as they have done in 2015, with AMP being up 11% year-to-date, versus a 1% gain for CBA.
