As more and more investors go in search of juicy fully franked dividend yields to compensate for lacklustre returns from term deposits, the S&P/ASX200 (INDEXASX:XJO) continues to push higher and higher. Mainly driven by blue chips in the S&P/ASX20 (INDEXASX: XTL), which make up well over 60% of the leading index.
Right now, the price to earnings ratio of the top 200 companies on the Australian market is 16.4 and they boast a price earnings to growth ratio of 2.06. Over in the US, the S&P 500 has a price to earnings ratio of 19.14.
So what does this have to do with your portfolio?
It should go without saying but, with the market trading at such high levels, it’s imperative you thoroughly scrutinise any investment before you create a new position. In addition, always keep a healthy cash balance to capitalise on opportunities. I know I do.
Telstra, which recently posted a strong set of full-year results, is one top dividend stock which income investors would love to own. I know I would. With a 5.2% fully franked dividend and long-term Asian growth strategy, it’s easy to see why it’s popular. However I believe Telstra shares have pushed beyond fair value and are no longer a firm ‘Buy’. I’ve said it for a while but as long as Telstra shares trade above $5.00, they’re not a compelling buy. Personally, I wouldn’t even pay that.
Coca-Cola Amatil (“CCA”) is at the opposite end of the spectrum when it comes to share price performance – in the past five years, its shares are down 5%, compared to a 26% gain from the benchmark index. It’s true CCA is facing a number of headwinds such as pricing pressures from the two supermarket majors and competitor Schweppes, as well as adverse macroeconomic conditions in Indonesia – its key growth market. Whilst I think the company could encounter some more pain in the future, I have confidence in the current management team and its ability to resurrect the company, over time.
However it’s possible with an increasingly health conscious society that CCA’s market place could be shrinking, or at least entering a holding pattern. It’s something which Woolworths’ shareholders are coming to grips with as its Masters home improvement store strategy isn’t progressing as well as the company would have hoped.
I think the home improvement strategy is great but it will take time to mature and become profitable. As such, with Woolies’ shares changing hands on a price-book ratio over 5 and PEG ratio of 4.42, I could not justify recommending readers buy some of the company’s stock. Given its current growth forecasts and the introduction of world-class supermarket brands such as Costco and Aldi, I wouldn’t be tempted to buy the stock unless it traded well below $30 per share.
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Motley Fool Contributor Owen Raszkiewicz is long $5.417 June 2016 Warrants in Coca-Cola Amatil.