The Motley Fool

Is FTSE 100 champion Diageo the perfect retirement stock?

Today, I’m taking a closer look at alcoholic beverage manufacturer Diageo (LSE: DGE). You may not be familiar with the name, but there’s every chance you know the company’s products. The FTSE 100 group owns a world-class portfolio of brands, including Johnnie Walker, Smirnoff and Tanqueray. Is this the perfect retirement stock?

World-class company

From a retirement-investing perspective, there are a number of things I like about Diageo.

For starters, there’s the defensive nature of the business. You see, as a ‘sin’ stock, Diageo is able to generate fairly stable revenues no matter the state of the global economy. If the economy is booming, you can be sure that people will be out drinking. Yet if the economy is struggling, the chances are people will still be drinking to drown their sorrows (they may downgrade from Johnnie Walker Black to Johnnie Walker Red, of course). So, the nature of the Diageo’s business provides a high level of stability and consistency, which is what you want in retirement.

This week’s full-year results are a good example of this. The numbers are certainly not mind-blowing, but they look solid, with organic net sales up 5%, and operating profit up 4%.

Emerging markets exposure

Another attractive feature of Diageo that makes it an ideal retirement stock is its exposure to the world’s emerging markets, which provides a long-term growth story. At present, Diageo generates around 20% of its sales from Asia, and another 20% from Latin America, the Caribbean, and Africa. This means that the group is well supported by macro trends and is very well placed to benefit from the rising incomes of consumers in these regions. The company expects that in the next decade, over 700m more consumers will be able to afford its premium spirits, with 85% of that growth coming from the emerging markets. As those market consumers become more wealthy, Diageo is waiting for them with a selection of premium spirits such as Johnnie Walker Double Black.

Dividend growth

The third attribute of Diageo that I think is highly attractive is the company’s dividend history. Over the last 20 years, the group has increased its dividend every single year, lifting the payout from 11p per share to 65p per share, which equates to an annualised growth rate of over 9%. That’s an outstanding achievement, and exactly what you want from a retirement stock.  

Is now the time to buy?

When I covered Diageo back in late March, the shares were changing hands for 2,360p. At the time, I stated that the shares were “getting close to the point at which they offered value.” However, since then, the shares have surged 20% to 2,830p. Is there any value left now?

That question is a source of much debate. While traditional value investors might tell you that Diageo’s current forward P/E of 22.3 is way too expensive, others believe that Diageo deserves a premium valuation. For example, top-rated UK fund manager Nick Train has stated that “exceptionally rare” companies that can compound their returns steadily for decades, such as Diageo, can justify P/E ratios of “30, 40 or more.”

Personally, I believe Diageo is a company to buy on the dips. The share price doesn’t fall very often, but when it does, that’s the time to buy.

Buy-And-Hold Investing

Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it right away!

Edward Sheldon owns shares in 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.