Readers of my recent articles will know that I'm not much of a fan of insurer Insurance Australia Group Ltd (ASX: IAG) ("IAG") at the moment. It's not that I think the business is poorly run, but it is mature, there is minimal room for growth, and it's also priced at a level where I think investors will struggle to see any sustainable gains.
IAG's 4.4%, fully franked dividend is appealing and should remain reliable over time, but if you're not looking for sustainable income at all costs then I would avoid this company. Instead I would prefer to own either Retail Food Group Limited (ASX: RFG) or Flight Centre Travel Group Ltd (ASX: FLT).
Retail Food Group is – believe it or not – a retail food conglomerate that owns a number of Australia's most popular franchises including Donut King, Gloria Jean's, Crust Pizza, and more. It's been growing well in recent times, although also carries a moderately high level of debt as a result of recent acquisitions. Management's focus on vertical integration should help the company cut out duplicative costs, and has already made Retail Food Group one of the largest coffee roasters in Australia.
Due to constant acquisitions and higher levels of debt, it is not a company I would rely on year-in and year-out for my retirement income, but it appears a solid investment opportunity, pays a 4.2% fully franked dividend and has much greater growth potential than IAG.
Flight Centre, on the other hand, could be more suited to the conservative investor, due to the company's strong balance sheet and cheap price tag. Would-be buyers will have to get comfortable with the threat of technical obsolescence however, with the company recently losing a small percentage of market share to online competitors.
Flight Centre has been slow to migrate to the online sector, primarily because its in-store salespeople attract a different type of client and provide a different type of service. The initial results from recent investments into new 'hyperstore' formats suggest that there is life left in the concept, although Flight Centre is also working on developing an online travel agent offering and entertaining a possible expansion into hotel management.
Management has suggested that there could be additional special dividends or a buyback in the near future, if the company can't find an attractive way to use all the cash it has squirrelled away. Either way, Flight Centre pays a 5.1% fully franked dividend, and appears a much better opportunity than IAG at today's prices.
