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2 FTSE 100 stocks I’d buy

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Although 2020 was a tough year, FTSE 100 stocks Diageo (LSE: DGE) and Reckitt Benckiser (LSE: RB) have done well over the past decade. Both stocks have more than doubled and that’s not counting the dividends that each pay. Given their past performance, overall operational strength, and potential, I’d still buy both companies at their current share prices.

Diageo

Diageo has regained some of its momentum. For the half year ended 31 December 2020, the company reported free cash flow of £1.8bn and management raised the interim dividend by 2% to 27.96p per share. Management is also “cautiously optimistic about the near-term continued recovery” of its business and overall confident in the future.

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In the future, I reckon Diageo could potentially maintain some of that momentum by utilising data and digital insights to increase marketing effectiveness. Given its financial strength, I think the company could also expand through M&A or by potentially creating new brands.

To me, Diageo has an attractive combination of defensive characteristics and growth potential. Given that its products are affordable for many, demand for Diageo doesn’t change all that much during difficult times. Diageo was still profitable during the recession in 2009 for example. With many of Diageo’s customers in developing nations where incomes will likely grow substantially in the future, I reckon the company could potentially grow earnings in the future too.

With that said, the market is expecting Diageo’s fundamentals to recover pretty strongly given its recent rally. If that doesn’t happen or if Diageo’s brands don’t sell as much as the market expects, the stock has potential downside.

Reckitt Benckiser

Reckitt Benckiser is a consumer staple with a portfolio of leading brands in hygiene, health, and nutrition. Given the company’s scale, Reckitt Benckiser can often realise attractive margins even while spending substantial money on advertising. With its portfolio of leading brands, the company also has a pretty wide moat.

As a leading consumer staple, Reckitt Benckiser benefits from long-term trends such as rising incomes and urbanisation, which often helps increase economic growth. Due to Reckitt Benckiser’s position in the market and its operational strength, I reckon the company has the potential to grow around 4%-6% on average annually in the medium term if management continues to perform as they expect. With that type of growth, I think Reckitt Benckiser earnings per share could grow in the future and management could potentially return more capital back to shareholders.

While management kept the full-year dividend per share for fiscal year 2020 the same at 174.6p, I think they could increase the dividend in later years as the company potentially achieves its goal of strengthening the balance sheet.

Although many leading consumer staples have historically been great companies to own, they face potential challenges from online competition. Given their position as platform operators, companies like Amazon could potentially compete more with Reckitt Benckiser in the future with internal brands. Those internal brands could potentially put pressure on Reckitt Benckiser’s margins or take away some of Reckitt Benckiser’s growth potential. Reckitt Benckiser could also have downside if the economy weakens or if management doesn’t deliver the results the market expects.

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Jay Yao has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Diageo and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

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