With the outlook for the Aussie economy being uncertain, it is challenging to know how much risk to take at the present time. For example, investing in the mining sector could prove to be a masterstroke right now. Valuations are down, the outlook is difficult to accurately predict, and profitability continues to come under pressure as a result of increasing supply and relatively weak demand.
Similarly, it may prove to be prudent to add stocks that have exposure to faster growing markets than Australia, and which also offer a degree of stability and consistency moving forward. One stock that fits this criteria is packaging company, Amcor Limited (ASX: AMC). It has superb long term growth prospects and, as its track record of growth shows, is likely to be a relatively consistent performer. In fact, Amcor's bottom line has risen at an annualised rate of 16.5% during the last ten years, which has allowed it to increase dividends per share by 8.1% per annum during the same time period.
However, due to a share price that has more than doubled since 2010, Amcor yields just 3.4% at the present time. And, despite dividends per share being expected to increase by over 11% per annum in the next two years, Amcor's yield is still due to be less than that of Rio Tinto Limited (ASX: RIO). It currently has a yield of 5.1% and, looking ahead, it is due to increase dividends at an annualised rate of 7.5% during the next two years.
That's possible due to Rio Tinto being expected to return to bottom line growth in 2016, with its earnings forecast to rise by 3.8% next year as the company increases output in the face of a weak iron ore price. However, as a result of its ultra-low cost curve, Rio Tinto's strategy of increasing production should place it in a relatively strong position in the long run as well as increasing profit in the short run, since it is likely to put further pressure on its higher cost rivals. Therefore, while its short term outlook may be rather risky, Rio Tinto remains a company with excellent long term prospects.
Despite this, Rio Tinto trades on a price to earnings (P/E) ratio of just 11, which is significantly lower than Amcor's P/E ratio of 19.2. And, with Amcor's bottom line set to fall at an annualised rate of 3.4% during the next two years, its rating could come under pressure in the short run – especially since investor sentiment has been upbeat in recent years.
So, while Rio Tinto is riskier than Amcor in terms of the certainty of its earnings growth profile, it has a wide margin of safety to accommodate this. And, with a return to growth being forecast to take place next year, a higher yield than Amcor and a much keener valuation, it appears to be the preferred option if you can only choose to buy one or the other.
