Just because the ASX has had a rather disappointing year thus far, it does not mean that there is a lack of stocks with huge long-term potential. Certainly, the short term may be a rather uncertain period, with the outlook for the Aussie economy likely to be somewhat challenging and further cuts in interest rates being a distinct possibility. However, there are a number of stocks which offer excellent total return prospects, with Commonwealth Bank of Australia (ASX: CBA) and Transurban Group (ASX: TCL) being two notable examples.
Income Prospects
A key reason why CBA and Transurban appear to be well-worth buying is their income potential, with CBA currently yielding a whopping 4.7% and Transurban having a yield of 3.8%. In CBA's case, it has an excellent track record of dividend growth, with them having risen at an annualised rate of 12% during the last five years. And, looking ahead, it is expected to raise them by 4.5% per annum during the next two years, which should mean that investors in the bank are able to benefit from a real-terms increase in their income.
Meanwhile, Transurban may have a lower yield than the ASX (which has a yield of 4.5%), but its dividend growth prospects are appealing, with it being set to raise shareholder payouts by 12% per annum during the next two years. This puts Transurban on a highly appealing forward yield of 4.5%.
Valuations
While the ASX trades on a price to earnings (P/E) ratio of 16.1, CBA offers a sizeable discount to the wider index, with it having a P/E ratio of 15.4. This means that its shares could be subject to an upward rerating over the medium to long term, especially with monetary policy set to remain relatively loose moving forward. This has the potential to stimulate demand for new loans and help to ease payment of existing loans, which should push CBA's profitability northwards.
Not to be outdone, Transurban is expected to post a rise in its bottom line of 30% per annum during the next two years as it integrates recent acquisitions into its business. This, when combined with its P/E ratio of 34.9, equates to a price to earnings growth (PEG) ratio of just 1.17, which is lower than the ASX's PEG ratio of 1.32 and indicates that growth is on offer at a reasonable price.
Risk
With the future of the ASX being somewhat uncertain, investing in low beta stocks could be a sensible move. They should experience less volatility than the wider market and, with CBA and Transurban having betas of just 0.8 and 0.9 respectively, their shares should move by 0.8% and 0.9% respectively for every 1% change in the price level of the ASX. Therefore, as well as offering bright income prospects at a great price, they could help to stabilise your portfolio during a challenging period.
