The State Pension isn’t enough! I’d buy Diageo shares today

Spirits giant Diageo plc (LON: DGE) can add a bit of fire to your pension planning.

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The State Pension does a valuable job in providing a basic income for retirement, but it isn’t enough on its own. If you want to spend your final years in relative comfort, you will need to invest under your own steam as well.

Even if you have a company pension, I would still recommend taking out a Stocks and Shares ISA to boost your retirement pot. You can invest up to £20,000 inside this year’s ISA allowance, provide you act before the 5 April deadline.

I would recommend spreading your money between a selection of funds and top FTSE 100 stocks such as global spirits giant Diageo (LSE: DGE). It has been one of my favourites for years, a solid, established company that grows steadily, and can provide a steady underpinning for the rest of your portfolio. After a strong run, the Diageo share price has dipped lately, and this could be a rare chance to buy it at a slightly reduced valuation.

I’ll drink to that

Diageo is one of those companies that always looks a little expensive to buy, and with good reason. It’s a premium business, selling premium drinks. Its brands include Guinness, Johnnie Walker, Baileys, Smirnoff, Captain Morgan, Gordon’s and Tanqueray, which it sells in more than 180 countries around the world. 

In the six months to 31 December, it posted reported net sales of £7.2bn, up 4.2% driven by organic growth. Reported operating profit rose just 0.5% to £2.4bn, but this was mostly due to temporary issues such as unfavourable exchange rates, exceptional operating items, and the impact of acquisitions and disposals.

Diageo’s share price growth has been rather splendid, rising 66% over five years, more than 10 times the average growth across the FTSE 100, which rose just over 6% over the same period. This would have been even better but for a 10% drop in its share price over the last six months, which makes it look more tempting to me, not less.

High shareholder returns

Diageo typically trades at around 25 times earnings, above the current FTSE 100 average of around 18 times. Today it is slightly below that at a 22.9 times earnings, which means it is available at a relative discount, by its high standards.

Those earnings are forecast to rise steadily, up 3% this year and 6% next, which should help keep the cash flowing. Its most recent half-yearly report showed free cash flow of £1bn, which was actually down £400m, largely due to one-off tax impacts and payment timings.

CEO Ivan Menezes oversees a generous shareholder return programme, which saw the interim dividend recently hiked 5%, while the company is also running a £1.1bn share buyback programme. It plans to return a massive £4.5bn of capital to shareholders over the next few years. So do not be fooled by the relatively low headline yield of 2.3%. In practice, the stock should be more rewarding than that.

Diageo is the type of long-term buy-and-hold that can help you generate extra wealth, freeing you from State Pension worries, I believe.

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 considered so you should consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. 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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