Despite dipping in early trading following the publication of its preliminary results for the full-year, drinks behemoth Diageo (LSE: DGE) remains a top pick for defensive investors with one eye on retirement, in my opinion.
Although fluctuations in trading are to be expected, its ownership of some of the most popular and recognisable tipples, including Guinness, Baileys and Johnnie Walker makes the possibility of a serious retreat in its share price far less likely than some of its peers in the FTSE 100.
It’s not like today’s numbers were even poor.
Cash-rich
At £12.2bn, reported net sales rose 0.9% over the 12 months to the end of June. Thanks to higher marketing costs being offset by productivity efficiencies, operating profit also rose by 3.7% to £3.7bn.
Although already perfectly respectable, it’s worth pointing out that currency headwinds were estimated to have impacted both of these figures by roughly £70m and £10m respectively.
Unsurprisingly, cash flow “continued to be strong” with the company generating £3.1bn in net cash and £2.5bn in free cash flow. As a result, Diageo joined fellow giant Royal Dutch Shell in announcing a new share buyback programme this morning — a move which will see up to £2bn returned to owners before the end of next June. This follows on from the £1.5bn given back over the last financial year.
In addition to this, Diageo’s management chose to hike the final dividend by 5%. At 65.3p per share, this gives a trailing yield of 2.25% for the year.
Looking ahead, CEO Ivan Menezes stated that expectations for Diageo’s mid-term performance hadn’t altered and that, through ongoing investment, mid-single-digit organic net sales growth was still predicted until the end of June 2019.
Diageo’s shares have been on rather decent form over the last year, rising 18% before today. A P/E of 24 looks dear but it could be argued that the company’s financial clout, high operating margins and geographical diversification justify such a valuation.
Since political and economic fragility won’t stop most people from consuming alcohol, I remain as bullish on Diageo’s long-term prospects as ever.
Dividend delight
Another ‘buy and forget’ FTSE 100 stock that could help set up a comfortable retirement, in my opinion, would be insurance beast Aviva (LSE: AV). Given the competitiveness of the markets in which it operates, however, I would use its sizeable payouts to shareholders — and the assumption that these will be reinvested and returns thus compounded — to justify this view rather than anything else.
Based on the current share price and assuming expectations of a 9% hike prove accurate, Aviva’s stock is forecast to yield a mouthwatering 6.1% in the current year.
Things could get even better. With excellent free cash flow and a rock-solid balance sheet, I can see the company continuing to direct even more cash to its owners going forward.
This is, of course, based on recent trading conditions continuing and investors continuing to back CEO Mark Wilson’s desire to simplify operations at the £19bn cap. Back in March, the company declared that performance in the UK — it’s biggest market — had “gone from strength to strength, growing sales, market share and profit“. I can’t see any reason for things to have severely deteriorated over the last few months.
Holders won’t have to wait long to find out. Aviva reports interim numbers to the market on 2 August.
