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Could Diageo plc be a millionaire-maker stock?

Global alcoholic beverages company Diageo (LSE: DGE) released an interesting set of results for the year to 30 June on Thursday. They showed that the company has enjoyed a bumper year, with a mix of organic growth, currency translation benefits and strong demand for its products helping to improve its financial performance. However, does this necessarily mean that it is now a strong investment for the long run?

Strong performance

Diageo enjoyed impressive performance across all of its regions. They contributed to organic net sales growth of 4.3%, while organic volume growth was 1.1%. However, when the positive effect of a weak pound was added to the mix, the company’s net sales and operating profit increased by 15% and 25% respectively. For a large and diversified business, such growth rates are exceptional and show that the 2017 financial year was an incredibly positive one for the company.

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Of course, its success was not only due to rising demand and foreign exchange benefits. There was also strong progress on productivity and this helped to push organic operating profit 5.6% higher. Furthermore, it means there is now greater confidence regarding the potential for margin improvements over the coming years. In fact, margin improvement is expected to be 175 basis points over the three years to 2019. This is up from a previous target of 100 basis points.

Investment potential

Diageo also announced its intention to conduct a £1.5bn share buyback programme in the new financial year. Alongside a 5% rise in dividends, this improves the income appeal of the stock. Certainly, a dividend yield of just 2.6% is not particularly impressive, but with more cash set to be returned to investors via a mix of dividends and buybacks, income investors may now find the stock more enticing for the long term. This is especially the case since free cash flow continued to be strong in the 2017 financial year. It increased by £566m to £2.7bn.

In terms of its growth potential, Diageo is forecast to record a rise in its bottom line of 8% in the new financial year. This is marginally ahead of the forecast growth rate for the wider index, and is likely to come with lower risk than many of the company’s index peers. The beverages company is well-diversified and has a wide economic moat which has been developed over a long period through rising levels of customer loyalty. This means that it offers defensive prospects alongside its growth potential, thereby increasing its overall investment appeal.

Valuation

Certainly, a price-to-earnings (P/E) ratio of 21.5 is hardly cheap. However, it is lower than a number of other global consumer stocks which arguably have less defensive business models. Therefore, it could be argued that Diageo offers fair value for money at its current price. While it is unlikely to make any investor a millionaire in the short run, in the long run it could offer strong investment performance to boost the value of any portfolio.

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Peter Stephens owns shares of Diageo. The Motley Fool UK has recommended Diageo. 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.

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