Why Diageo is my top FTSE 100 stock to buy in June

The FTSE 100 only has a few truly exceptional companies. But Stephen Wright thinks one of them is trading at a bargain price right now.

| More on:
BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In general, I look to focus my investing on companies with truly exceptional attributes. That means I’m only really interested in a handful of FTSE 100 shares.

It’s rare to find these stocks trading at bargain prices. But in the case of Diageo (LSE:DGE), I think there’s an opportunity with the share price at a 52-week low.

Economics

Diageo’s dominant position in the spirits industry allows the business to maintain some impressive economic characteristics. The first is returns on equity (ROE) and the second is cash conversion.

Over the last 10 years, the company’s managed to achieve an average ROE of around 28%. That’s significantly higher than the FTSE 100 average of 11%. 

Cash conversion’s also impressive. Around 33% of the cash the business generates through its operations is used in capital expenditures, meaning 67% becomes available to shareholders.

It’s no accident Diageo has these attractive properties. With some of the leading brands in a number of categories and a huge distribution network, it has some durable advantages over its competitors. 

Cyclicality

Despite its attractive properties, the Diageo share price has been going down. The stock fell 5% in May, while the FTSE 100 advanced 1.3%. 

The main reason seems to be macroeconomic pressure. Weak consumer spending has been weighing on sales in Latin America and the Caribbean and there’s a risk of something similar happening in the US.

Most of Diageo’s portfolio is focused on the premium end of the market. And with no real switching costs, the company has no real way of stopping customers trading down.

The big risk is that the trend towards premium spirits that emerged over the last few years might not prove durable in a world with higher interest rates. But it’s not all bad news for shareholders.

Reasons for optimism

Last month, pub group JD Wetherspoon issued a trading update. The company noted that sales of Guinness – Diageo’s beer product – had been growing strongly, especially outside its traditional customer base. 

Guinness accounts for around 20% of Diageo’s total revenues. So growth in this area might go some way towards offsetting weak sales in other categories. 

Wetherspoon’s chairman Tim Martin put this down to fashion. But I think there’s something more significant than this for investors to take note of. 

The increased popularity of Guinness might be the result of consumers being more price conscious at the moment. And this indicates Diageo has a portfolio that can generate growth even in a downturn.

A stock for all seasons

Investors are justifiably wary about consumers trading down from premium products. But I think the market’s underestimating the resilience of Diageo’s portfolio. 

Growing Guinness sales should help stabilise revenues in the short term and I expect the firm’s strong position to generate good returns over time. That’s why I’m buying the stock at today’s prices.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Diageo Plc and J D Wetherspoon Plc. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »