Why I’d snap up FTSE 100-member Diageo’s share price for my Stocks and Shares ISA

Diageo plc (LON: DGE) could outperform the FTSE 100 (INDEXFTSE:UKX), with its long track record of generating impressive financial performance set to continue, I believe.

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With the FTSE 100 having more than doubled in the last decade, it is perhaps unsurprising to find that a number of its members have high valuations. After all, a decade-long bull market is bound to cause significant uplifts in the ratings of a wide variety of shares.

One such company is Diageo (LSE: DGE), with the alcoholic beverages stock having a price-to-earnings (P/E) ratio of over 25 at the present time. Despite its high valuation, the company’s growth rate could prove to be impressive, as well as resilient. As such, it could be worth buying alongside another highly-rated FTSE 100 stock that released an update on Tuesday.

Growth potential

The company in question is wealth management business St. James’s Place (LSE: STJ). It has experienced an encouraging start to the year, with gross inflows of £3.61bn being only slightly down on the £3.91bn recorded in the same period of the previous year. Alongside strong retention, net inflows during the period were £2.18bn. This equates to 2.3% of opening funds under management, which highlights the robust performance of the business during what has been an uncertain period for the wider wealth management industry.

Looking ahead, St. James’s Place is forecast to post a rise in its bottom line of 20% in the current year. Therefore, while it trades on a P/E ratio of 21, its price-to-earnings growth (PEG) ratio is little more than 1. This suggests that the stock could offer good value for money. Alongside this, the stock has a dividend yield of 5%, which could mean that its total return is highly impressive over the long run.

Robust prospects

While Diageo’s valuation may be high, it has a long track record of generating impressive financial performance. Its current strategy could continue this trend, with significant investment in growth markets across the emerging world providing it with a strong foothold at a time when wages are moving higher.

The company has put in place a more efficient business model that is increasingly focused on a smaller number of brands. Certainly, it still has a wide portfolio of beverages, but is now able to focus investment in areas that could offer higher growth rates. This may lead to an increasingly dynamic performance from the business, and could allow it to generate an improving rate of earnings growth.

With Diageo expected to post a rise in earnings of 7% in the current year, there are other stocks in the FTSE 100 that offer higher growth rates. However, with the prospects for the world economy being uncertain due to the potential for a full-scale trade war, there may be few shares that offer such resilient growth. As such, the stock seems to be worthy of a premium valuation, and could outperform the FTSE 100 over the long run. This means that now could be the right time to add it to a Stocks and Shares ISA.

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.

Peter Stephens owns shares of Diageo. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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