In recent months, most high-quality FTSE 100 stocks have rebounded to where they were trading before Covid-19 hammered the stock market in February and March. Unilever, for example, has climbed above the 4,700p level it was at in February. Similarly, Reckitt Benckiser, another top-quality business, has climbed well above the 6,500p level it was trading pre-Covid.
There are some high-quality FTSE 100 stocks, however, that have failed to climb back to their 2020 highs. Alcoholic beverages champion Diageo (LSE: DGE) is one such stock. Its share price has recovered a little since late March but remains well below its 2020 highs of around 3,300p.
Portfolio manager Nick Train – who’s sometimes called ‘Britain’s Warren Buffett’ – believes Diageo’s share price weakness has created a fantastic opportunity for long-term investors. I agree with Train. I think buying Diageo shares now, while they’re out of favour, could turn out to be a very smart move.
Nick Train sees an opportunity
In a recent interview with Morningstar, Train discussed his holding in Diageo. The reason he likes the FTSE 100 stock and sees it as an “important holding” is that the company owns a large collection of well-known, trusted brands.
“I don’t think there’s any debate about this. Diageo is the best collection of alcoholic beverage brands in one company that exists anywhere in the world. We’re lucky that it’s a UK company,” he said.
Acknowledging that Diageo shares are down around a quarter from their peak, Train said that he believes investors now have an “incredible opportunity” to invest in brands of the calibre of Johnnie Walker, Tanqueray, and Guinness. He believes these kinds of well-known brands aren’t only going to be around next year, but also in 50 years.
“That kind of permanence and durability… that’s how you protect wealth and you continue to get rich steadily,” he said.
A top FTSE 100 stock I’d buy now
I fully agree. In my view, Diageo’s share price weakness has created a fantastic buying opportunity. Recently, I’ve been adding to my position in the FTSE 100 stock.
I don’t expect Diageo shares to rebound quickly. The company faces plenty of short-term challenges due to Covid-19. With bars and pubs unable to operate normally, ‘on-trade’ sales are likely to be muted for a while. More lockdowns could create further challenges.
However, I’m convinced that in 10 years’ time, Covid-19 will be a distant memory and Diageo’s sales and profits will be much higher than they are today (another 750m consumers will be able to afford Diageo’s brands by then). My view is that in 2030, today’s share price will look like an absolute bargain.
Analysts expect Diageo to generate earnings per share of 125.1p for the year ending 30 June 2022. That puts DGE on a forward-looking P/E ratio of 21. A dividend payout of 70p is expected this year, which equates to a prospective yield of about 2.7%. I think these are attractive metrics.
If you’re a long-term investor, I think that buying now, while the FTSE 100 company is experiencing some short-term challenges, could turn out to be a very smart move.
