Shares in FTSE 100 beverages company Diageo (LSE: DGE) were hit by the coronavirus. That’s despite the company’s appeal as a relatively defensive share. All boats got dragged down as the tide went out in March.
That situation, however, creates an opportunity for investors because the shares are still down 10% over the past six months. I think this makes Diageo shares a great long-term buy and indeed I’ve been adding to my position in the company – topping up as recently as earlier this week.
Why buy Diageo shares?
There are a few reasons why I want to buy the shares. There’s the obvious point that they are now cheaper than they were – although that in itself isn’t a reason to buy. The reasons to buy are the quality of the company, the defensive nature of the shares, and the potential for sustained dividend growth.
I think the shares are quality because Diageo owns a portfolio of brands, many of which are leaders in their categories. Think Guinness, for example. On top of that, the company has international markets and produces huge amounts of cash.
Demand for alcohol isn’t going away. Even during lockdown when many are worried about their financial future, demand for alcohol has held up. The downside is obviously trading from pubs and restaurants has all but dried up in many countries – especially in the UK. That situation is, however, starting to change already and should improve in the coming months.
Then thirdly, when it comes to dividend growth potential I think the shares are well ahead of many of the higher yielding peers. Dividend cover just below two. That indicates to me that there’s room to keep increasing shareholder rewards and this is what I want to see.
To my mind, Diageo shares are a great long-term buy and I’ll be adding to my holding again soon no doubt.
A tasty alternative
If you’d prefer to focus on soft drinks, Britvic (LSE: BVIC) combines a price-to-earnings multiple of 13 with a dividend yield of 2.7%. It’s worth noting the interim dividend has been suspended.
I’d suggest in some ways then Britvic is riskier than Diageo, as it’s smaller and has been hit by sugar taxes. At the end of last year it also had a big write-down on the value of its French assets, although it has since sold bottling facilities in the country. With bigger risk though, it could also offer greater rewards.
At the end of May, the group said coronavirus was still hitting profits at around £12m–£18m a month. Hence the decision made on the dividend. It needs to conserve cash until the worst effects of the lockdown pass.
On the upside, for the six months to 31 March, Britvic reported a pre-tax profit of £53.6m compared with £45.2m a year ago. Brands such as Robinsons, Drench, Fruit Shoot, and R Whites will stay in demand this summer regardless of what happens with Covid-19 or the economy. Overall I think Britivic shares could also be worth buying.
Andy Ross owns shares in Diageo. The Motley Fool UK owns shares of and has recommended Britvic. 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.