With interest rates seemingly likely to continue their recent descent as a result of an uncertain outlook for the Aussie economy, dividends are set to play an even more significant role in the income of investors across Australia. Certainly, cash balances are set to produce lower returns and, while inflation is currently under control, a looser monetary policy could leave many investors struggling to generate a positive real return over the medium term.
As a result, stocks such as Coca-Cola Amatil Ltd (ASX: CCL) and Woolworths Limited (ASX: WOW) appear to be worth buying at the present time. However, while Woolworths has a higher yield than Coca-Cola Amatil (5.1% versus 4.6%), the latter seems to be the more appealing income stock at the present time.
A key reason for this is the differing outlooks for the two companies. On the one hand, Woolworths is expected to report a decline in its bottom line over the next two years, with net profit set to fall at an annualised rate of 3.5%. Furthermore, margins are set to be further squeezed by the increasing presence of no-frills, discount stores such as Aldi and Costco which could lead to an escalation of the current supermarket price war.
And, with Aussie consumers focusing on price to an increasing degree as the economic outlook remains uncertain, Woolworths could post disappointing results in the short run, with its dividend forecast to rise by just 0.4% per annum (which is less than inflation) over the next two years.
Meanwhile, Coca-Cola Amatil is coming through a tough period, with its bottom line set to benefit from a restructuring and efficiency programme that is forecast to boost net profit by 5.4% per annum during the next two years. And, with the scope to expand into new and fast-growing markets across Asia, Coca-Cola Amatil appears to offer more diversity and less reliance on a flagging Aussie economy than Woolworths, which means that it is expected to increase dividends at an annualised rate of 3.5% over the next two years. As such, the current difference in yields between Coca-Cola Amatil and Woolworths should narrow over the medium term.
Furthermore, Woolworths also appears to need to make major changes to its business model in order to improve its financial performance. For example, its Masters home improvement chain appears to need a refreshed strategy and, with the company searching for a new CEO, there is a degree of uncertainty regarding its future plans, with there being rumours of potential divestments of non-core assets, for example. Coca-Cola Amatil, meanwhile, has a much more settled strategy and, with a US$500m cash injection recently made available, it has the financial firepower to grow its business abroad.
Of course, Coca-Cola Amatil trades at a premium to Woolworths, with it having a price to earnings (P/E) ratio of 18.3 versus 14.1 for Woolworths. However, with a better earnings outlook, growing dividend, clear and sound strategy, as well as growth potential in Asia, it appears to be the better income stock, even though it has a lower yield than Woolworths at the present time.
