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Telstra Corporation Ltd and Coca-Cola Amatil Ltd: Should you buy?

2014 has been a very different experience for investors in Telstra Corporation Ltd (ASX: TLS) and Coca-Cola Amatil Ltd (ASX: CCL). That’s because, while shares in the former have made gains of 7%, the latter has seen its share price decline by 24% since the turn of the year. However, does this now mean that Coca-Cola Amatil offers good value for money? Or is Telstra all set to be the better investment moving forward?

Income prospects

On the face of it, both Telstra and Coca-Cola Amatil offer great income prospects. For instance, Telstra currently pays a fat, fully franked yield of 5.2%, while Coca-Cola Amatil’s 75% franked yield of 5.4% is also hugely impressive. Especially when Aussie interest rates are just 2.5%.

However, delving a little deeper highlights a potential cloud on the horizon for income-seeking investors. Both companies are set to see earnings decline in the current year. In Telstra’s case, EPS is expected to fall by 11.8%, while Coca-Cola Amatil is forecast to report a bottom line that is 22% lower than last year.

The effect of this on dividends is fairly major, with Telstra due to increase its dividends per share by just 1.7% this year, while Coca-Cola Amatil is expected to reduce them by 28.2%.

Looking ahead

Clearly, this is not good news for investors and means that Coca-Cola Amatil’s yield could drop to 4.6% (assuming a constant share price). However, things are due to pick up for both companies in the following year, when earnings growth of 7.2% (Telstra) and 3.5% (Coca-Cola Amatil) are pencilled in. Dividends per share for Telstra, though are set to remain flat next year, while Coca-Cola Amatil is expected to raise them by 7.1%.

Although there is due to be a pickup in their bottom lines, both companies still face considerable competitive pressure. For instance, Telstra’s battle with Optus seems to be escalating and could lead to reduced margins and profitability moving forward. Meanwhile, Coca-Cola Amatil’s much-publicised competition with rival, Schweppes, is also hurting its profitability right now. Despite an announcement that the company will seek to make $100 million of cost savings over the next three years, it appears as though high levels of competition are here to stay over the short term at least.

Valuation

Despite this, shares in the two companies trade on fairly rich P/Es of 15.3 (Telstra) and 16.3 (Coca-Cola Amatil). Indeed, it appears as though their long term future is the fundamental driver of their current valuation, as opposed to their current financial performance. Although income investors will undoubtedly be attracted to both stocks due to their high yields, it could be worth waiting for a pickup in bottom line performance (or a keener share price) before adding either company to your portfolio.

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Motley Fool contributor Peter Stephens does not own shares in any of the companies mentioned.

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