There’s no denying that Diageo (LSE: DGE) has underperformed this year. Concerns about the company’s growth have spooked investors and sales within China have been hit hard by the government’s anti-extravagance measures. Nevertheless, after a tough 2014, Diageo is expected to return to growth next year as cost-cutting measures and growth initiatives take effect.
For example, Diageo is expected to report earnings growth of 4% next year, which is nothing to get excited about. Still, after earnings fell 7% during 2014 growth of 4% is much needed. Diageo currently trades at a forward P/E of 17.6 and is expected to support a dividend yield of 3.2% next year.
Additionally, Diageo recently completed the acquisition of a majority share in India’s United Spirits, giving Diageo access to one of the world’s largest alcoholic beverage markets. The company has all the foundations in place to drive rapid growth over the next few years.
World leader
As one of the world’s largest pharmaceutical companies, GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is one of the market’s most defensive investments. Indeed, the world will always need drugs and vaccines to prevent illness and Glaxo is at the forefront of drug development.
With more than 40 new products in the company’s pipeline, as well as a portfolio of consumer healthcare products Glaxo is well placed for growth. The company is also in the process of testing a possible Ebola vaccine
Nevertheless, during the past 18 months the company has come under fire, as it has been accused of bribing doctors to sell its treatments. The company has been found guilty of bribery within China and paid a fine of £300m, removing much of the uncertainty surrounding the bribery issue. Now, Glaxo’s shares look like a steal as they trade at a forward P/E of only 14.9 and support a dividend yield of 5.5%.
But this lowly valuation and attractive dividend yield isn’t going to stick around forever. It could be time to buy Glaxo’s shares before they re-rate.
Dividends are back
Lloyds (LSE: LLOY) (NYSE: LYG.US) has staged an impressive recovery since its taxpayer funded bailout. Unfortunately, for much of the past year Lloyds’ share price has traded in a tight 10p range, although this could be about to change.
The main catalyst that could send Lloyds’s shares higher is the re-introduction of a dividend payout. Lloyds has not offered shareholders a dividend since 2009 and restarting payments would signal that the bank is on the road to recovery.
Before Lloyds can begin to issue dividends again, the bank first has to seek the approval of the banking regulator, the Prudential Regulation Authority (PRA), which is part of the Bank of England. The PRA’s approval is expected during the second half of this year and a small token dividend payout is expected afterwards. The City is currently expecting a small payout of 1.23p per share this year, a yield of 1.6% at present.
However, over the next few years some analysts believe the bank will return around 70% of income to investors. If City predictions prove true and the bank does hike its payout ratio to 70%, then with earnings of 8p per share forecast for 2015, Lloyds’ could offer a dividend payout of 5.6p per share, a yield of around 7.4%. Hiking the dividend payout to 5.6p per share would definitely send Lloyds’ shares surging.
