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Should you buy Coca-Cola Amatil Ltd, FlexiGroup Limited, and Woolworths Limited?

Just yesterday I wrote an article on whether the incredible 6%-8% dividend yields of some stocks were sustainable.

The answer is yes, they are (mostly!) and investors certainly have a lot of choice when it comes to getting a dividend that is substantially better than a savings account.

Coca-Cola Amatil Ltd (ASX: CCL) is another favourite of dividend investors, and it certainly makes an interesting case. Trading on a Price to Earnings (P/E) ratio of 18, the company is expensive compared to the rest of the ASX, although it is cheap compared to beverage manufacturers internationally.

It offers a 4.7% dividend and the promise of ‘sustainable mid-single digit’ earnings growth over the next few years. Over the longer term the company has significant potential for growth in its fledgling Indonesian operations, although growth in the ANZ region could be limited.

Stern competition from Pepsi is an item of concern, although as yet it is difficult to see one company achieving a sustained competitive advantage over the other. Some investors also worry that Coca-Cola may be made irrelevant as the world moves to healthier beverages, though I would contend that as a beverage bottler, Amatil is in as good a position as any to exploit this trend.

FlexiGroup Limited (ASX: FXL) featured in yesterday’s article on the sustainability of dividends, thanks to its mind-boggling 7.6%, fully franked yield. If the average long-term return of the sharemarket is ~10% per annum, FlexiGroup owners need less than 1% price appreciation per annum to make it a winning idea.

The company has been heavily sold off on fears around slowing growth and deteriorating conditions for small businesses and consumers (Flexi’s main customers). However, I think that Flexi could be in a marginally better position than other retailers as its interest-free and leasing offers are less intimidating than a big up-front cash outlay when times are tough.

While FlexiGroup – unlike Amatil or Woolworths – failed to beat the index since listing, that means the business is roughly the same price it was ten years ago, despite a threefold increase in profits since then. With a decent balance sheet and great cash flow, FlexiGroup’s dividend looks quite sustainable despite a slim growth outlook and I think the company is cheap today.

Finally Woolworths Limited (ASX: WOW) is a company that I would not buy today, although I am fence-sitting and it is getting close to a price that I find appealing.

While the company has a decent balance sheet I have an idea that there could be worse to come for the share price as lower margins and increasing competition are felt in overall profits. I am also waiting for some more clarity on the group’s Masters and Big W stores, which are a drag on earnings.

However, the company is far from a lost cause and its 5.6% fully-franked dividend is a big drawcard. I would look for Woolworths shares around $23 or below.

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Motley Fool contributor Sean O'Neill owns shares of Coca-Cola Amatil Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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