On a particularly busy day for stock market announcements, I’m drawn to the latest results from FTSE 100 drinks giant Diageo (LSE: DGE). This is a company I’ve long believed this is one of the best shares to own as we emerge from the coronavirus crisis. In fact, to paraphrase billionaire investor Warren Buffett, it’s easily a stock I’d consider holding “forever”. This morning’s news goes some way to justifying this bullish stance.
FTSE 100 recovery play
Naturally, the near-blanket closure of hospitality venues over the last year was never going to be great news for the company. Indeed, Diageo reported today that Covid-19 “significantly restricted” many of its markets. Beer sales in Europe were especially affected, it said. Then again, I think these hurdles have allowed the company to show just how resilient it is.
Today, the FTSE 100 member announced net sales of £12.7bn for the year ending 30 June. That’s an 8.3% rise on sales at this point in 2020. In fact, it would have been even better if not for the impact of foreign exchange headwinds. Operating profit also jumped 74.6% to £3.7bn.
As an indication of just how well the company had managed the pandemic, Diageo revealed it had managed to hold or grow its share of the off-trade market (drinks not consumed in places like bars and restaurants) in over 85% of its business. Moreover, this growth doesn’t appear confined to just a few tipples. Sales of drinks such as tequila, scotch, white spirits and Baileys were all up.
In terms of geography, North America was particularly buoyant, helped by a rise in the popularity of premium spirits. That’s handy, considering this is Diageo’s largest market.
Long-term winner
Of course, I’d never buy a stock purely on one set of results. The real test of a company’s quality is its ability to grow my money over the long term. On this front, Diageo would score very well. Today, it announced it had delivered annualised returns of 13% for shareholders over the last decade.
I think this performance will continue, especially as its bumper £3bn in free cash flow should allow it to remain an ultra-reliable dividend payer.
Today, the company announced a total payout of 72.55p a pop — an increase of 4% on that returned in 2020. This gives Diageo a trailing yield of 2.1%. Now, that’s far below what I can get elsewhere in the FTSE 100. However, higher yields usually involve more risk, such as owning stakes of companies in far more cyclical markets.
So, if I were looking to generate a reliable dividend stream that I could ‘set and forget’, Diageo would arguably be the better buy.
Buy and hold
Diageo’s shares are trading flat this morning, suggesting that much of today’s news was already priced in. At 27 times forecast earnings before markets opened, the stock certainly isn’t cheap.
Nor is the firm immune from setbacks. Indeed, CEO Ivan Menezes reflected that the blue-chip still expected “near-term volatility in some markets.” And while Covid-19 infection levels seem to be mercifully reducing here, there’s no guarantee rising cases elsewhere in the world won’t impact trading for the rest of 2021 and beyond.
Notwithstanding this risk, today’s numbers from the FTSE 100 stock, supported by its historical performance, suggest to me this should still be a great long-term hold.
