We’re over a month into the new tax year and I’m looking for additions to my Stocks and Shares ISA. I want to make the most the £20,000-a-year limit every UK investor’s given to utilise the tax-free benefits on offer. One stock in particular has caught my eye: Diageo (LSE:DGE).
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The FTSE 100 constituent’s a global leader in the alcohol beverage market. It’s home to premium brands such as Smirnoff, Captain Morgan and Guinness.
The stock looks undervalued. But aside from its cheap price, its dividend track record’s what’s really drawing me in.
Stable income
Dividends are never guaranteed. We saw this first-hand during the pandemic. Therefore, when a company has increased its dividend for 37 years, it tends to catch my attention. That’s exactly what Diageo’s done.
Today, it yields 2.9%. Now that’s by no means the highest out there. It’s even below the Footsie average (3.9%). But, in my opinion, its track record makes it an incredibly attractive investment proposition.
When I target income, I like to look for opportunities where I feel the dividend on offer is in good shape to continue being paid out in the years to come. Just because a stock has a high yield, it doesn’t mean it’s sustainable.
Take Vodafone as an example. Right now, it yields 11.2%, the highest on the Footsie. However, it was recently announced it will be slashed in half from 2025.
A good time to buy?
So there are a few things I look for when buying shares. One is stable income. Diageo clearly ticks that box. The next is solid growth opportunities. But does Diageo have that?
I’d say so. Firstly, its share price looks cheap, and I reckon it has room to grow. In the last 12 months, the stock’s lost 21.2% of its value. It’s now trading on a price-to-earnings ratio of 20.2. That’s below its long-term historical average of 24.
What’s more, the stock’s trading at its cheapest level in a decade when looking at its price-to-sales ratio. Today, it sits at 3.76.
The risks
The biggest risk to Diageo in the near term is falling sales. The cost-of-living crisis has led to consumers cutting back on spending. As such, in its latest update, it reported a 1.4% decline in revenues. The impact of this was felt mostly in the Latin America and Caribbean. Sales fell 23% in the region.
With more economic uncertainty on the horizon in 2024, there’s the potential that the theme of weak sales will continue. As consumers continue to feel the squeeze on their finances, there’s the threat they opt for cheaper alternatives.
I’d still buy
But I’d still buy Diageo shares if I had the cash. Sales have experienced a blip but, at its current price, I see real long-term value, especially with the premium names Diageo has under its umbrella. I think it could be a savvy buy.
Management has big plans. It aims to grow Diageo’s share of the global beverage alcohol market to 6% from 4.7%. That’s a massive customer base for the business to capitalise on. Most importantly, it also offers stable income.
