From Sydney to New York, it seems dark clouds are gathering over the global economy. Economic growth has already stalled in Britain, based on the latest official gross domestic product numbers, and with Brexit looming on the horizon, things could get a lot worse.
In times like these, savvy investors retreat to so-called ‘safe havens’. Traditionally, safe havens included government bonds from developed countries and premium real estate in megacities, all of which now seem overvalued to me. Some investors prefer gold. I, however, prefer an income-generating asset that has stood the test of time and prospered despite downturns — Diageo (LSE:DGE).
The alcoholic beverage giant is arguably one of the most stable and robust stocks on the FTSE 100 index. Its track record of wealth creation dates back to the early 1990s and investors who bought the stock in, say, 1997 have seen their capital multiply seven-fold to-date.
The stock has also been able to withstand the pressures of economic downturns. During the global financial crisis of 2008-09, when the broader index was down 40% from its peak, Diageo only lost 30% of its value. Over the past five years, which include the Brexit vote and its aftermath, the FTSE 100 has only gained 8.1%, while Diageo is up 96.6%.
If you include share buybacks and dividends, the total shareholder return over that period would be even more impressive.
Better than gold?
It’s difficult to deny gold’s merits as a safe-haven asset. The spot price of the commodity has quintupled since the year 2000. That implies a compound annual growth rate of 8.9%, while Britain’s average inflation rate has been 3.1% over that period.
However, even if gold can replicate this performance in the future, Diageo’s 2% dividend yield, £4.5bn share buyback programme, and 30.5% return on equity outshine the yellow metal. Coupled with its historic resilience to economic upheavals, I believe Diageo is safer than gold.
Moving forward, I’m optimistic about Diageo’s prospects because of the strength of the company’s underlying brands, the shape of its balance sheet, and the diversification of its income sources.
As I mentioned in a previous article, Diageo has significant exposure to both North America and emerging markets. This means the ongoing Brexit turmoil will be offset by a stronger US dollar, while slowing growth in developed markets will be offset by growing consumption in India and China.
Diageo’s scale and product mix make it somewhat impervious to economic cycles. As mentioned, the stock retained much of its value during the great financial crisis a decade ago. Since then, shareholders have more than doubled their investment if dividends and share buybacks are accounted for.
Looking ahead, its track record of wealth creation, the global scale of the company’s distribution network and the promised £4.5bn share buyback programme make this stock more appealing to me than gold.
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VisheshR has no position in any of the shares 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.