Despite a trading hit caused by the pandemic, FTSE 100 premium alcoholic drinks giant Diageo (LSE: DGE) just held its final 2020 dividend flat. I think that’s a big achievement underlining the strength of the business. And to me, Diageo is one of the best UK shares to buy now.
Why I think Diageo is one of the best UK shares to buy now
In all companies, I reckon the directors’ decisions regarding dividends tell us a lot about what they think about current trading and the outlook. Diageo has kept the final dividend for the trading year to June 2020 at the same level as the previous year’s. When added to the earlier interim dividend, the total dividend for the year has increased by 2%. In the teeth of Covid-19, Diageo is not letting its shareholders down.
But the trading figures were grim for the period. Today’s full-year results report reveals to us that net sales dropped by almost 9% compared to the prior year. Declines in most regions offset growth in North America. And overall organic volumes fell by just over 11%. The effect on earnings was dramatic with a plunge in earnings per share of just over 50%.
Chief executive Ivan Menezes explained in the report there was “consistent” performance in the first half of the trading year. But Covid-19 caused the business “significant challenges” in the second half. Meanwhile, the company has been fighting back by managing costs, reducing discretionary expenditure and reallocating resources across the business. It’s also enhanced its data analytics and technology tools to “rapidly” respond to “local consumer shifts triggered by the pandemic.”
On top of that, Diageo has strengthened its financial liquidity by pausing its share buy-back programme. And it’s brought forward a US$2.6bn (£2bn) bond issuance launched in April 2020 and arranged a credit facility of £2.5bn.
Set to emerge stronger from the pandemic
Menezes reckons the pace of recovery from the pandemic will be “uncertain”. But he expects volatility to continue in the company’s markets through the current trading year to June 2021. However, he’s “confident” about the firm’s strategy and the “resilience” of the business. He reckons Diageo is well-positioned to “emerge stronger” from the crisis.
I reckon Diageo was always in a good position to survive the pandemic. The business has produced chunky, double-digit operating margins and returns on capital for years. It has a long record of robust revenue, earnings and cash generation. And the dividend has been stable and rising steadily. Operations have been defensive and stable for as long as I can remember.
As is often the case on results day with many companies, the share price is weak today. But I see this stock as a solid long-term buy and I’d pounce now to lock in the dividend that has just proved its resilience. With the share price close to 2,705p, the forward-looking earnings multiple for the current trading year is just below 23 and the anticipated dividend yield is around 2.6%. I reckon the valuation reflects the quality of the enterprise and looks like a fair price.
