The stock market crash has resulted in a number of FTSE 100 shares looking extraordinarily cheap. But as Warren Buffett states, “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price”. As such, it seems advisable to look at some of the highest quality FTSE 100 shares. I particularly like these two.
This FTSE 100 share oozes quality
The first FTSE 100 share that piques my interest is Diageo (LSE: DGE). This multinational beverage and alcohol company operates in more than 180 different countries and has over 200 different brands. These include big names such as Guinness, Smirnoff, and Baileys. These brands have attracted significant customer loyalty over the years, and I believe that this will still be the case in 40 years’ time.
Trading at a price-to-earnings ratio of 22 and a price-to-book ratio of 9, Diageo shares cannot be classed as cheap. Nevertheless, considering its quality, its current share price of around 2,700p seems a fair price to pay. After a 15% drop year-to-date, it could also be a case of buying the dip.
On the other hand, the share is not completely risk-free. Due to Covid-19, the pubs and restaurants that sell Diageo drinks remain closed, and their return date remains unknown. This is likely to decrease Diageo profits this year. In addition, Diageo also has around £13bn of debt. While this is not unsustainable at the moment, it could be a problem should customer demand remain lower for a significant period of time. Although these shouldn’t be a major problem due to Diageo’s quality, it is worth considering before investing in Diageo shares.
The perfect defensive share?
Another FTSE 100 share with significant customer loyalty is Unilever (LSE: ULVR). Unilever owns some of the most well-known brands in the world, present in 98% of households across the UK. Examples include Dove, Magnum, and Lynx. Such a large variety of brands should help ensure the longevity of the company.
Once again, Unilever shares are not cheap. They have a P/E ratio of 22.8 and are in fact up around 4% year-to-date. But unlike other FTSE 100 shares, Unilever has not seen a decrease in sales over the pandemic. This is due to a number of household staples, which ensures the company’s resilience in a market downturn. Unilever has also seen an increase in sales in its hygiene sector.
Another positive is a reliable dividend which yields around 3.2%. This has a dividend cover of 1.35. While the dividend is not a huge amount, it’s still one to watch for income investors. This is because there seems very little risk of a cut, unlike many other FTSE 100 shares these past few months.
In summary, while both these shares may seem expensive, I think their quality seems to justify their price. This is especially useful at the moment, when quality should help protect stocks from another market downturn. I’d have no hesitation in buying these shares today!
With global markets in turmoil as the coronavirus pandemic tightens its grip, turning to shares to generate income isn’t as simple as it used to be…
As the realities of ‘life under lockdown’ begin to bite, many of the stock market’s ‘go-to’ high-yielding companies have either taken an axe to their dividend pay-outs… or worse, opted to suspended them altogether – for the near-term at least.
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*Please be aware that dividends are variable and not guaranteed.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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.