The Motley Fool

Forget the State Pension, FTSE 100 share Diageo may be all you need

Since the age at which the State Pension is paid continues to rise, and payments currently amount to just £164 per week, buying FTSE 100 shares such as Diageo (LSE: DGE) could be a good idea. One reason is that the company offers long-term growth potential, given its diverse business model and exposure to fast-growing consumer markets across the globe.

However, it’s not the only stock that could deliver high growth over the long run. Reporting on Monday was another share which could generate impressive capital returns in the coming years.

Improving outlook

The company in question is super-budget hotel operator easyHotel (LSE: EZH). The company announced  it has opened three further owned hotels, as well as two franchised hotels. This takes the total number of owned rooms open to 1,130, with a further 1,938 franchise rooms now open. All five hotels are trading strongly and in line with management expectations.

The company also announced on Monday that it has conditionally acquired a 999-year lease in Blackpool. It will develop a 103-room hotel, subject to receiving planning permission. The hotel is expected to open during the company’s 2021 financial year, and has the potential to catalyse its financial performance.

The popularity of super-budget hotels could increase due to weak consumer confidence. With consumers seemingly worried about Brexit and the potential impact on their disposable incomes, they may trade down to cheaper options. Since the stock has a price-to-earnings growth (PEG) ratio of just 0.6, it seems to offer significant upside potential over the long run.

Growth potential

The prospects for the Diageo share price also seem to be relatively upbeat. The company’s expansion plans in recent years look set to pay off, with increasing exposure to emerging markets making it increasingly appealing from an investment perspective. Allied to this, is the stock’s geographic diversity, with its exposure to a range of countries having the potential to provide a resilient growth outlook should one region experience a slowdown.

Diageo’s recent update showed that alongside its sales growth potential, its margins are also improving. An efficiency programme, which has been running for a couple of years, is gradually making the business leaner and more profitable. This could catalyse the performance of the stock, and may attract investors at a time when the prospects for the global economy remain buoyant.

One area where the company is somewhat disappointing is its dividend. It has a yield of just 2.6%, which is 140 basis points lower than the dividend yield offered by the wider FTSE 100 at the present time.

However, with dividend payments being covered 1.8 times by profit, and the company having the potential to generate improving financial performance, its long-term income prospects appear to be bright. As such, now could be the right time to buy it, having the potential to help an investor to improve on those disappointingly-low payments from the State Pension.

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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.