I’ve made a habit of buying dirt cheap, high-yielding FTSE 100 shares lately, but I’m wondering if I should temper my enthusiasm. Stocks are often cheap for a very good reason, and may struggle to recover their lost value.
I must be open to buying expensive shares too, because they can be expensive for an excellent reason, namely that they’re magnificent companies. For me, drinks giant Diageo (LSE: DGE) and consumer goods from Unilever (LSE: ULVR) both fall into that category.
Premium stocks, premium prices
Both are well established blue-chips that consistently trade at premium valuations. Currently, Diageo has a price/earnings ratio of 22.03 times earnings, while Unilever trades at 18.25 times. These are comfortably above the average FTSE 100 P/E of around 10.5 times.
Investors love these two FTSE 100 stocks because they combine defensive capabilities with growth potential. Consumers continue to buy alcohol and branded soap in a recession, the first as a little luxury in hard times, the second as a cheap necessity.
Their growth prospects are so strong because these are truly international companies with massive global footprints. Diageo has 200 brands and sells them in 180 countries, Unilever tops that with 400 brand names across more than 190 countries.
This diversification further reduces risk, because if sales fall in one country, they may rise in another to compensate.
This doesn’t mean they’re without risk. Diageo’s long-standing chief executive Ivan Menezes is stepping down after a successful 10 years, and will be a hard act to follow. Menezes himself has warned of today’s challenging operating environment amid geopolitical uncertainty, weaker consumer spend, price pressures and post-Covid supply chain disruptions.
I’d like to buy them both
Unilever faces the same challenging conditions, as customers struggle with rising prices while inflation also pushes up its costs. Chief executive Alan Jope will also retire, at the end of 2023, after five years in the role.
These challenges are reflected in their recent stock dips. The Diageo share price has fallen 7.59% over the last month, while Unilever is down 9.19%. Measured over one year, Diageo is down 8.93%, while Unilever has climbed a modest 5.33%. Today’s P/Es look high but are actually relatively low by their lofty standards, reflecting these falls.
While more than a dozen stocks on the FTSE 100 yield 7% or more today, these are consistently at the lower end. Today, Diageo yields 2.28% and Unilever offers income of 3.66%. While low, both companies have delivered steady dividend growth, which should give me a rising income over time.
While no stock is immune to the ups and downs of the business cycle, Diageo and Unilever are two of the most solid companies on the entire FTSE 100. Both are now on my shopping list for June. I’m aiming to add them both to my SIPP this month as the stock market dips again.
As ever, I’ll buy with a long-term view, with the aim of holding them for decades. This gives them time to deliver plenty of share price and dividend growth, while minimising the inevitable risks that come with investing in any individual company stock.
