A common question asked by investors who are just starting their investing journey is: should I invest in income stocks or growth stocks? The answer, of course, is there doesn’t have to be a choice if you find the right stocks. Some can deliver both. Here I look at some FTSE 100 shares that have done just that, and consider whether they can keep up their winning streak.
A toast to excellence
What do the brands Smirnoff, Gordon’s Gin and Guinness all have in common? They’re all owned by British drinks giant Diageo (LSE:DGE). In fact, Diageo owns over 200 brands sold in more than 180 countries. This large portfolio of brands has driven excellent business results for many years.
And this has been reflected in the share price, which is up around 8% over the past 12 months, compared to the FTSE 100’s gain of 4.8%. Over five years, shares of Diageo have outperformed the FTSE 100 by a wide margin, returning 55% versus a decline of about 1% for the index. If we add in Diageo’s dividend, which currently yields around 2%, then we have a stock that has delivered both growth and income over decent time frames.
In its most recent update, Diageo reported operating profit of £4.4bn, which was up 18% year over year. Its brands continue to gain market share overall and there was broad-based growth across all regions and categories, with particularly strong growth in scotch, tequila and beer.
Importantly, Diageo noted that ”price increases and supply productivity savings more than offset the absolute impact of cost inflation”. This means that Diageo, so far, has been able to pass costs onto its customers, which demonstrates both its pricing power and brand loyalty. This year’s final dividend was also increased by 5%.
The company also announced that it has acquired 21Seeds, a rapidly growing tequila brand, and disposed of a portfolio of brands in India. I like this constant product optimisation, where Diageo buys exciting new brands with the profits of cash-cow staples (such as Johnnie Walker and Buchanan’s), whilst ditching poor-performing labels. This is a great competitive advantage.
Of course, we should consider the impact a global recession could have on the performance of Diageo shares. During recessions, consumers tend to tighten belts and spend less money on discretionary activities, such as dining out in restaurants and visiting cocktail bars. Obviously, if consumer demand weakens for its brands, Diageo could see a fall in profits. Though unlikely, this might even result in a cut to its dividend. That could negatively affect the share price in the short term.
That said, there’s the old truism that ‘the strong tend to get stronger‘ during challenging times. So I envisage Diageo opportunistically adding more brands to its portfolio during a recession. And there is also the darker reality that when the economy goes to the dogs, consumers often find solace and distraction in, say, the odd glass of Johnnie Walker or Baileys Irish Cream.
I expect Diageo to keep winning, and I’m considering adding shares to my portfolio in the near future.