For companies operating in the consumer goods industry, there are peaks and troughs in their financial performance. That's just the way it is. For periods of time, demand for their products is high, margins are expanding, sales are growing and profitability is going through the roof. However, at other times it is quite the opposite, with investor sentiment declining as a result.
While this situation can trouble investors' nerves, it can also create opportunity to benefit from the rise and fall of consumer stocks. And, with this in mind, the likes of Wesfarmers Ltd (ASX: WES) and Coca-Cola Amatil Ltd (ASX: CCL) appear to be well-worth buying at the current time ahead of significantly improved performance.
For example, Coca-Cola Amatil is currently doing all of the right things to turn around dismal performance that has been a feature of recent years. It has cut costs, driven through efficiencies and committed to a significant marketing budget so as to improve consumer demand for its products.
This appears to be having a positive impact on the company's outlook, with it now being expected to deliver earnings growth of 5.4% per annum during the next two years. This would be a marked improvement on the 25% fall in the company's bottom line from last year and show that, while there is still some way to go before Coca-Cola Amatil's expansion into countries across Asia begins to have a positive impact on its results, it is moving in the right direction.
Similarly, Wesfarmers also endured a challenging last financial year, with its bottom line falling by 0.7%. This, of course, is mainly due to external factors, with Wesfarmers' supermarket division being hurt by shoppers trading down for cheaper products and utilising no-frills operators such as Aldi and Costco for their basic purchases, too. This has caused Wesfarmers to become more competitive on price and, while margins are likely to come under pressure, the company's forecast growth rate of 6.4% per annum during the next two years shows that it remains a well-run business that is able to address the difficult operating conditions that a large part of its business is currently facing.
Clearly, both stocks have posted disappointing share price performances since the turn of the year, with them being down 4% (Wesfarmers) and 8% (Coca-Cola Amatil). Partly as a result of this, they both yield 4.9%, which is higher than the ASX's yield of 4.6%. Furthermore, the two companies' dividend growth is set to outpace inflation over the next couple of years, with shareholder payouts set to rise by 2.5% (Wesfarmers) and 3.5% (Coca-Cola Amatil) per annum during the period.
As a result, they remain top notch income stocks and, while they trade at premiums to the ASX in terms of their price to earnings (P/E) ratios being 18.4 (Wesfarmers) and 17 (Coca-Cola Amatil), versus 15.2 for the wider index, now appears to be a great time to buy a slice of both companies for the long term.
