Buy Stocks Like Diageo plc And GlaxoSmithKline plc To Hedge Against Labour Victory

How Diageo plc (LON:DGE) and GlaxoSmithKline plc (LON:GSK) could benefit from a Labour government.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The General election is just over 12 months away, and the latest YouGov poll shows Labour with a 7% lead over the Tories. It could be time for investors to position their portfolios in anticipation of a potential Labour victory.

There’s little doubt that some sectors would be hit if the Labour party forms the next government. Energy shares have been knocked for six since Ed Miliband proposed a price freeze. He’s also called for a cap on market shares of the big banks and lobbied for greater regulation of high-street bookmakers. Other industries are no doubt looking over their shoulders.

Pound CoinsThe winners are…

Fortunately, there are some shares that would benefit from a Labour win. That’s because it would very likely lead to a decline in the value of the pound. Indeed Labour’s biggest donor, John Mills, the eponymous boss of gizmo-seller JML, wants an explicit policy to devalue sterling to boost exports and growth. But irrespective of any deliberate policy, it’s probable that the election of a Labour administration that has consistently criticised the Coalition’s austerity package and called for more stimulus measures, and whose natural affinity is with higher spending and higher wages, will lead to a depreciation of sterling.

That would flatter the sterling results — and the hard cash dividends — of companies that do most of their business in other currencies. The dollar-denominated mining sector, and the oil and gas industry, come to mind.

A change in the wind

But also a slew of global companies have been reporting currency headwinds that have held back sales and profits, prompting analysts to take a red pen to earlier forecasts. Sterling weakness would alleviate that and boost reported earnings.

Diageo (LSE: DGE) (NYSE: DEO.US) and GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) are prime examples. Adverse currency movements cost Diageo £54m in lost profits last half-year. It estimates they will knock £280m off the full year, that’s around 8% of total operating profits. GSK saw a 3% drop in operating profits last year, due entirely to currency movements. Earnings forecasts for both companies have been progressively downgraded.

Attractive

Both companies have attractive long-term prospects. Diageo is the world leader in premium spirits and its powerful brands give it immense market power, yet there’s plenty of scope for growth in Latin America and Africa. It has increased its dividend every year since 1997. GSK has turned the corner on the patent cliff and has a promising pipeline of new drugs, whilst its vaccines and consumer health-care businesses add stability. It has paid an increasing dividend for over 20 years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Tony owns shares in Diageo and GSK.

 

More on Investing Articles

Young Black man sat in front of laptop while wearing headphones
Investing Articles

With its 7% dividend, should I be watching the Aviva share price?

Dividend investors will struggle to find many companies with a yield above 7%, so should the Aviva share price be…

Read more »

Investing Articles

Could this be one of the FTSE 100’s best cheap dividend shares?

Looking for the best dividend growth shares to buy? Our writer Royston Wild thinks this FTSE 100 housebuilder might well…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Is this FTSE 100 passive income superstar also its best bargain right now?

This FTSE 100 gem still looks to me like one of the best bargains in the index. It appears very…

Read more »

Investing Articles

If I’d put £10,000 into Meta stock at the start of 2024, here’s what I’d have now

Our writer looks at the year-to-date performance of Meta stock and considers whether he'd consider buying this magnificent tech share.

Read more »

Hand arranging wood block stacking as step stair on paper pink background
Investing Articles

Investing £5 a day in this dividend giant can make me a £14,067 annual second income!

This FTSE 100 high-yield star can make me a major second income, supported by a strong business outlook and an…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Taylor Wimpey shares yield a fabulous 6.41%, but is the dividend safe?

Harvey Jones has enjoyed plenty of growth and income after buying Taylor Wimpey shares last year. But is today's high…

Read more »

Yellow number one sitting on blue background
Investing Articles

1 FTSE lithium stock I think could be ready to rocket

Jon Smith explains why the lithium price could be due a rally, and why shares of one related FTSE stock…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
US Stock

This growth stock that Warren Buffett owns just hit 52-week lows. Should I buy?

Jon Smith flags up a high-profile US stock that the great Warren Buffett bought back in 2020 but which has…

Read more »