The best long-term share market investors generally look for these characteristics in the companies they buy:
- A durable competitive advantage
- Generous dividend yield
- Capable management
- Modest growth potential; and
- A fair share price
For Australian investors, there are few companies which can tick off all the boxes and not every company which ticks them all will go on to be successful investments.
Depending on who you ask, both Coca-Cola Amatil Ltd (ASX: CCL) and Telstra Corporation Ltd (ASX: TLS) boast all the characteristics above. But after a volatile year (see below) the question on everyone's mind is: Are they in the buy zone now?
Here's how they've tracked in 2014…
Source: Google Finance
Over the past few years Telstra shares have been a standout performer on the back of increasing mobile market dominance, divestments from costly assets and an increase in dividends per share. Its Network Application Services (NAS) and International divisions have also showed signs of long-term growth potential. Factoring in the company's recent share buyback, at today's prices it trades on price-earnings ratio of 15 and a dividend yield of 5.2% fully franked.
Shares in Coca-Cola Amatil, on the other hand, have had a tough couple of years and in 2014 alone are down 25.5%. Despite boasting one of the strongest brand names in the world, its margins are coming under huge threat from increased competition from key rivals and the two supermarket giants. However a recent injection of capital from parent The Coca-Cola Company and a cost-cutting drive by CEO Alison Watkins could begin to turn things around. At current prices it has a P/E ratio of 17 and dividend yield of 4.5%.
Buy, Hold, or Sell?
At today's prices I believe Coca-Cola Amatil is the better buy simply because it has more to gain in the next five years. Telstra, whilst also growing throughout Asia, doesn't come cheap and I'd rather wait to pick up shares when investors aren't falling over themselves for its juicy dividend yield. However investors have no reason to rush on either stock because there's a host of other, cheaper, dividend stock ideas available right now…
