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Why I’d still buy FTSE 100 star-performer Diageo for my ISA

The Diageo  (LSE: DGE) share price is a good advertisement for buy-and-hold, long-term investing, I reckon.

Over the 10 years between July 2009 and July 2019, the premium branded alcoholic drinks producer’s share price has elevated by around 268%. That’s not bad for a ‘lumbering giant’ of the FTSE 100. Indeed, the firm now sports a massive market capitalisation close to £80bn.

Fast-moving, cash-generating consumer goods

The outperformance has been driven by the world’s craving for the company’s well-known brands such as Guinness, Baileys, Captain Morgan, Smirnoff, Johnnie Walker and Tanqueray. There’s no doubt Diageo is what some investors jokingly refer to as a ‘sin’ stock. But if you are looking for a robust financial performance from the underlying businesses behind your shareholdings, sinners can often be winners on the stock market.

In general, companies peddling fast-moving consumer goods that are backed by strong brands can generate stable, predictable cash flows – ideal for backing up dividend payments to shareholders.

But with the ‘sin’ stocks, I think that concept is pumped up with an extra layer of intensity. In times of general economic hardship, for example, I’d observe that stuff such as booze, fags and ‘a daily flutter on the horses’ can be the very last things to disappear from personal budgets.

A full-strength valuation

Yet despite the rise of Diageo stock over the most recent decade, there have been periods where some shareholders could have lost their faith in the stock. Between July 2013 and July 2016, for example, the share price dipped a bit then ended up where it started.

But that’s not surprising because it’s popular, and the valuation runs at full-strength most of the time. Therefore, any slight disappointment in the numbers produced is likely to stall progress or cause weakness in the price as investors fret about their forward growth assumptions.

The up-trend in the shares has been robust lately, so are we about to see another period of stagnation in the stock? I don’t think there’s much to worry about in today’s full-year results report to 30 June.

Organic sales volumes moved 2.3% higher compared to the year before driving an organic net sales increase of 6.1%. The company puts this success down to “broad-based” performance across the business and in most regions around the world.

Strong cash flow

Organic operating profit outperformed the revenue figures by rising 9%. There was a better price mix and “productivity benefits from everyday cost efficiencies.” 

But the acid test is in the cash account, and the news is good there too. Net cash from operations moved 5.4% higher and free cash flow went up 3.4%. The directors used the cash headroom to slap 5% on the total dividend for the year and extend the share buy-back programme to the tune of £4.5bn.

Diageo appears to be doing exactly what I want. It’s improving its figures a bit each year and progressing shareholder returns. But we can’t rule out another period of share-price stagnation ahead. After all, at the current 3,295p, the forward-looking earnings multiple for the current trading year runs a shade below 24, and the anticipated dividend yield is about 2.2%.

Not cheap, but given the quality on offer, even now I’m more likely to be a buyer rather than a seller of the shares for my retirement portfolio.

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Kevin Godbold has no position in any share mentioned. 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.