The FTSE 100 hasn’t delivered excellent returns over the past few years, falling behind other global indexes like the S&P 500 and the Nasdaq. However, this does not mean that individual FTSE 100 stocks haven’t performed well. Two good examples include Diageo (LSE: DGE) and AstraZeneca (LSE: AZN), both of which have provided steady returns for investors over the years. But can these companies continue to outperform the FTSE 100?
The drinks giant
In the past five years, the Diageo share price has risen an astounding 80%. This can be compared to the broader FTSE 100 return of just over 7%. This outperformance has been driven by the company’s record of shrewd acquisitions, which has helped boost profits over the years. As a result of the rising profits, Diageo’s dividend and share buyback programmes have also increased, benefiting shareholders.
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Things are going well at the moment, and Diageo is near its all-time high, sitting at just below 4,000p. This is partly due to recent strong half-year results, with operating profits increasing 22.5% to £2.7bn. Operating margins also increased by 190 basis points, demonstrating that the firm has dealt well with inflationary pressures. There is hope that profits can continue to increase too.
There are some risks, however. For example, the Russia-Ukraine conflict has meant that the group has paused exports to Russia and the Russian division has suspended manufacturing its beers. Although Diageo’s business in Russia contributes less than 1% of operating profits in the half-year results, this is still not good news.
Further, a price-to-earnings ratio of over 20, which is now larger than ‘growth stocks’ Netflix and Meta, demonstrates that further growth is expected. This means that any slip-up will be heavily punished.
Despite these risks, I still feel that Diageo can continue to outperform the FTSE 100, albeit to a lesser extent than in the past five years. This is due to its excellent quality. Therefore, I’m not selling the Diageo shares in my portfolio.
The second-largest FTSE 100 stock
After rising over 130% in the past five years, AstraZeneca (LSE: AZN) has established itself as the second-largest FTSE 100 stock, trailing only Shell. This has been achieved from a history of rising revenues and profits.
Recent developments have also been positive. For example, in the latest full-year trading update, revenues were able to increase 41% year-on-year to over $37bn, and core earnings per share increased from $4.02 to $5.29. Reported EPS was far lower ($0.08), due to the acquisition of Alexion and restructuring charges during the year. As these are short term, this is not overly worrying to me, however.
Alongside these results, AZN also announced that five of its medicines were “crossing blockbuster thresholds”, showing industry-leading research and development productivity. The drugs Evisheld and Tezspire also received approval, giving hope to the company for 2022.
There are a few problems, however. Firstly, revenues from its vaccine are starting to diminish. This means that revenue growth is likely to be far slower from now. Secondly, AZN also trades at a price-to-earnings ratio of over 20, meaning that growth is expected. Pharma is a very volatile industry, so I’m not convinced the company can live up to expectations. Therefore, this is a FTSE 100 stock I won’t be buying just yet, due to its expensive valuation.
