FTSE 100 investors need to tread carefully as they consider which stocks to buy in 2023.
US thinktank The Conference Board recently forecast that, “the US and Europe [will] experience recessions in the very near term”, and that China will suffer “significantly weaker growth” in 2023.
Economists are becoming increasingly convinced of sluggish growth (or even a global recession) next year. And by extension, the earnings and dividend forecasts for many UK shares are looking increasingly fragile.
A FTSE 100 share on my radar
However, I don’t plan to press the pause button and wait until conditions improve. I plan to continue investing in my Stocks & Shares ISA in 2023.
Drinks manufacturer Diageo (LSE: DGE) is a defensive FTSE 100 stock I already own. Here’s why I’m planning to increase my holdings next year.
Brand power
Diageo has two significant weapons that allow it to thrive even during tough periods.
One is that demand for alcoholic beverages remains stable at all points of the economic cycle. The second is that its heavyweight labels like Guinness and Captain Morgan command intense customer loyalty.
Its Johnnie Walker and Smirnoff labels, for example, are two of the world’s four largest spirits brands by retail sales volume. That’s according to drinks industry researcher IWSR.
Products with popular labels usually continue selling in exceptional volumes even when broader consumer spending power falls. This allows Diageo to enjoy robust profits year after year.
Marketing spending
Diageo spends fortunes on marketing its products to keep them ultra popular. And this has a big impact on its earnings. It may have to keep increasing such expenditure too as the marketing landscape evolves. The business hiked organic marketing spending 25% year-on-year in the 12 months to June 2022.
But as an investor myself this is a price I’m happy to pay. Not only do I see Diageo as a reliable lifeboat in these uncertain times. I expect sales of its drinks to grow strongly over the long term as personal incomes in emerging markets soar.
Dividend growth
Admittedly the company doesn’t carry the biggest dividend yield out there. For this fiscal year it sits at a handy, if unspectacular, 2.3%.
However, I fully expect Diageo to meet current dividend forecasts. It’s in a much stronger position to do this than many other FTSE 100 shares.
Firstly, the drinks firm has those highly stable revenues to fall back on. Secondly, this year’s predicted dividend is covered a healthy 2.1 times by anticipated earnings, too. That provides a wide margin of safety in case earnings forecasts miss their mark.
The drinks giant also has considerable balance sheet strength to help it raise dividends even if it experiences temporary profits trouble. Its free cash flow clocked in at a robust £2.8bn last year.
The annual dividend at Diageo has risen for 21 years on the spin. As someone seeking reliable dividend income every single year, I think the company is hard to beat.
