The FTSE 100 index hosts some of the top companies in the world. While the index receives a lot of investor interest, it is not equally distributed across every company. Darlings like Rolls-Royce and Lloyds see high daily trading volumes, while other top companies are overlooked, especially during a bear run.

I have identified two such FTSE 100 shares that are currently in the bottom half of the index when ranked by the 30-day average trading volume. And I think these companies look like they are ready to explode when the next bull run hits. 

Overlooked superstars

Spirax Sarco (LSE:SPX) and Croda International (LSE:CRDA) were big pandemic winners. Between March 2020 and December 2021, these two shares gained over 110%. In fact, Croda International was a top FTSE 100 performer across 2021, jumping 57% in a year. 

But since this bull run, both shares have fallen significantly. Croda bottomed out at 4,490p in June 2022 after hitting all-time highs in December 2021. Spirax-Sarco too fell over 46% during the same period, bottoming out at 9,130p. 

This caused investor interest to dampen. Thirty-day trading volume for Spirax-Sarco and Croda is currently at 168,000 and 434,000, respectively. For comparison, Lloyds shares recorded 205.33m trades during the same period. 

But I think the tides are changing. Since the June low, both companies have rebounded by over 22%, showing me that if the market is healthy, these shares could grow very fast. 

Finances

Croda International is a speciality chemical company operating in Britain for over a century. It focuses on chemicals used in beauty and personal care products. The firm also has a huge agriculture wing that focuses on chemicals required for crop growth. 

The recently released first-half (H1) 2022 results showed that sales jumped by 21% compared to H1 2021. Similarly, profit before tax went up 26% to £636.5m including proceeds from recent sales. 

The company recently redoubled its growth efforts in the fragrance industry, which is witnessing strong growth in emerging markets. It has a projected valuation of $58.8bn by 2022 which would bring compounded annual growth to 5.6%. 

The second company on my list, Spirax-Sarco, is an engineering firm with a focus on steam management systems. This share gained a lot during the recent green energy push across Europe. And this has gathered more steam this year, making the market ripe for Spirax-Sarco, which creates efficient energy systems for industries. 

In 2021, the company recorded a revenue of £1.3bn, up 17% from 2020. Total profits were £340.3m with an impressive margin of 25.3%. A strong positive is that insiders purchased Spirax shares worth over £462,000 last year and sold nothing.

While these are strong signs for both companies, I think there are some concerns to address. Both boards have noted fluctuating commodity prices as a major cause of concern for the coming months. Also, Croda has been spending a significant amount on R&D, which could backfire if there is a market crash. 

And it is unlikely that these companies will recreate the runs they had in 2020. But given the strong fundamentals and large market share, I think I would make an investment in both companies in 2022 provided the rebound continues. 

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Croda International. 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.

The trouble is, it’s not hard to find companies that feature in the top tier and yet have massively outperformed it. One example is speciality chemicals firm Croda International (LSE: CRDA).

FTSE 100 beater

Over the last year, the £12bn cap has climbed 43% in value (including today’s near-7% rise). For comparison, the FTSE 100 is up 15%. 

It’s not just that Croda has beaten its index over the last year. The long-term gains have been excellent too. Since 2016, the share price has appreciated a little over 145%. The FTSE 100? Just 4%. Even though the latter boasts a larger dividend yield that can be reinvested, there’s simply no contest when it comes to performance.

Based on Croda’s fundamentals and today’s interim results, I don’t see this trend changing soon.

Record first half

Thanks in part to a recovery in demand “across all regions and sectors“, sales jumped by almost 39% to £934m from January to June. At 60%, growth at its Life Sciences division was a particular highlight. Importantly, the FTSE 100 stock announced that sales were now “well above 2019 levels” before the pandemic struck. 

As such, it was no surprise that the company reported record adjusted pre-tax profit of £229.5m. That’s 50.5% higher than at this point last year. It’s also 35% higher than two years ago.

Although unlikely to generate much interest from income hunters due to its relatively low yield, I also noted that Croda hiked its interim dividend by 10% today. As the firm itself highlighted, this continues “an unbroken trend of increasing returns over nearly 30 years“. This is the sort of consistency that separates the wheat from the FTSE 100 chaff, in my opinion.

Richly-valued

Looking ahead, Croda thinks recent momentum will continue over the remainder of 2021. Thanks to ongoing demand from customers and the contribution of new acquisitions, the company now expects adjusted pre-tax profit to be “significantly ahead of current expectations“. No wonder the share price is setting fresh highs today. 

This is not to say an investment in Croda now would be devoid of risk.

As always, past performance is no guide to the future. Despite today’s news, the company commented that sales of solution ingredients relating to Covid-19 “could moderate” in the months ahead.

At 38 times forecast earnings before markets opened this morning, Croda’s valuation is also undeniably rich. When markets shake, it can be the case that holders of the most expensive stocks suffer the most. And even if the FTSE 100 generally behaves itself over the rest of 2021, we could see more investors taking profits and rotating into battered value stocks as the pandemic is sent packing. 

For holders of a fund tracking the return on the index, this won’t be a problem. However, it could cause some short-term pain to those backing Croda.

Still a buy for me

Despite the above concerns, I’d still buy the stock today based on its track record and growth potential. In an index that arguably features some established, but ultimately very average, companies, CRDA looks to be a great exception.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Croda International. 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.

They’re not the best known stocks on the FTSE 100, but few will have rewarded investors as well over the past five years. If I had £5k to invest today, or any other sum for that matter, I’d consider splitting it between these two companies. Free of tax inside a Stocks and Shares ISA.

The Croda International (LSE: CRDA) share price is up a thumping 110% over five years. It fell during the stock market like almost every other FTSE 100 stock, but has recovered strongly and now trades notably higher than in January.

Two top FTSE 100 stocks

The speciality chemicals company hasn’t survived the Covid-19 market crash completely unscathed though. Last month, it reported a 12.8% drop in first-half pre-tax profit to £144.9m, as customer demand fell during the lockdown.

Trading’s now stabilised but the future is unclear and, like every other company, Croda is waiting to see how the recovery pans out. It’s still maintained its dividend though.

Croda has been a long-term growth star, with a total return of 563% over 10 years, according to AJ Bell. It has trashed most FTSE 100 stocks and this largely explains why the dividend yield looks relatively low at 1.5%, although nicely covered 2.1 times. Progression is all though, and management has shown plenty of that. It has increased the payout at an average annual rate of 15.3% for the last decade. Next year may see a smaller rise of 2.6%, analysts predict.

My one worry is that the Croda share price is expensive as it trades at 32 times earnings. Sales are forecast to rise 12% next year though. You pay a price for quality these days. Others may prefer to buy cheap shares, right now.

Delivering both growth and income

My next FTSE 100 stock pick is life-saving technology specialist Halma (LSE: HLMA), another unsung hero. The Halma share price has performed even better than Croda’s, rising an incredible 200% over five years. It’s also bounced back from the March crash, although not with quite the same vim.

Last month, Halma posted record annual profits and revenues for the 17th year in a row, boosted by an impressive 10 acquisitions. However, it did warn profits could fall in 2021, depending on the speed of the recovery.

The group looks well-placed to survive the recession, with strong cash generation, a robust financial position, and substantial liquidity. Again, the yield looks low at 0.74%, but that’s mostly down to rapid share price growth. Management has increased its dividend at an average rate of 7% over the past decade, and analysts predict another 8.2% hike next year.

Again, the problem here is the valuation. Halma trades at almost 40 times earnings.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Croda International and Halma. 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.

Buying stocks just because they have a high dividend yield can be a disastrous strategy because, more often than not, a dividend yield far above the market average is a sign that payout isn’t sustainable. If the distribution is cut, the resulting capital loss can eliminate years of dividend income.

With that in mind, I’m going to look at two FTSE 100 dividend stocks that might not have the highest yields around, but have some of the safest distributions in the index, in my opinion.

Impressive track record

The first company I’m going to profile is Bunzl (LSE: BNZL). This distributor is, without a doubt, one of my favourite FTSE 100 companies. Over the past few decades, the business has gone from strength to strength, expanding steadily through a combination of acquisitions and organic growth.

The company lives well within its means while reinvesting a substantial portion of profits back into the business to drive growth. Net profit has grown at a compound annual rate of just under 10% per annum for the past decade, and net debt has remained relatively constant as a percentage of shareholder equity. It has bounced between around 80% and 100% during the past five years.

That might seem like a lot of debt from an asset perspective, but because the business is relatively asset-light, the figures are somewhat misleading.

From a cash-flow perspective, Bunzl’s debt metrics are much less concerning. Last year, the company generated around £450m in free cash flow from operations compared to net debt of £1.4bn. These figures imply Bunzl could pay off all of its creditors in three years.

The dividend cost Bunzl £152m last year, which gives the company plenty of headroom to increase the distribution in the years ahead. And that’s why I think this stock could be an excellent investment if you’re looking to build a second income stream. At the time of writing, the shares support a dividend yield of 2.5%.

Market leader

The other dividend champion I think might be worth considering for an income portfolio is Croda (LSE: CRDA). This stock currently supports a dividend yield of just under 2%. But the payout is covered twice by earnings per share, which gives the company plenty of headroom to increase the distribution in the years ahead.

What’s more, Croda is one of the world’s leading producers of speciality chemicals, which tells me it’s unlikely to ever experience a sudden drop in earnings. Producing chemicals for products such as cosmetics is a specialist industry, where customers have to be sure their products are of the highest quality, so they don’t tend to change suppliers. 

Croda has been able to capitalise on this. Net profit is up around 35% in five years and earning should continue to grow steadily for the foreseeable future. These qualities tell me Croda could be an excellent investment for your second income stream portfolio.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

In other words, he likes high-quality companies that generate consistent earnings, are highly profitable, and have strong balance sheets. So are there any Warren Buffett-type stocks in the FTSE 100? Let’s have a look.

A Buffett screen

To examine the FTSE 100 for high-quality stocks, I set up a basic quality screen with a number of common quality attributes. Specifically, I listed the following criteria:

• 5-year average return on capital employed (ROCE) > 15%

• 5-year annualised sales growth > 5%

• 5-year annualised operating cash flow growth > 5%

• Current ratio > 1.5

• Number of consecutive dividend payments > 5

• Long-term debt to equity < 50%

• Index: FTSE 100

I’ll point out this is just a basic quality screen. I could certainly have added more criteria. Yet I figured it would give me a good indication of companies that are growing, are profitable, and are financially sound. Here are the FTSE 100 companies the screen generated:

• 3i Group

• Hargreaves Lansdown

• Croda International

• Persimmon

• Taylor Wimpey

• Berkeley

So would Buffett invest in any of these six names?

FTSE 100 Buffett-style stocks

In my view, the two companies he would be most likely to go for are Hargreaves Lansdown (LSE: HL) and Croda International (LSE: CRDA). I think he’d be less inclined to go for the three housebuilders and 3i because they’re more cyclical. For example, all four of these companies slashed their dividends dramatically during the Global Financial Crisis.

Hargreaves Lansdown is certainly a stock I think Buffett might be interested in. In fact, Nick Train, who is often referred to as ‘Britain’s Warren Buffett’, is a big fan of the stock and has a large position within his UK Equity Fund.

Hargreaves is not a particularly cheap stock, but it does tick a lot of boxes from a quality investing perspective. For example, it has generated consistent growth over the last decade and ROCE has averaged 81% over the last five years, which indicates the company is highly profitable.

Interestingly, Hargreaves shares have taken a whack this month over the Neil Woodford debacle and are down over 20%. I wonder if that could get Buffett interested? The phrase “be fearful when others are greedy and greedy when others are fearful” comes to mind.

Croda – an under-the-radar company that makes specialty chemicals for a number of industries including cosmetics, healthcare, and farming – is another high-quality company that might interest Buffett.

The stock has been a fantastic performer in recent years and has smashed the returns from the FTSE 100. Moreover, it’s now registered 20 consecutive dividend increases which is an excellent achievement and the sign of a top-quality company, and also recently paid out a huge special dividend to shareholders. 

Like Hargreaves Lansdown, Croda shares are not particularly cheap. Currently, the stock trades on a P/E ratio of 25.6 and the dividend yield is just over 2%. If Buffett was interested in the stock, I think he might be inclined to wait until a more attractive buying opportunity presented itself, given that he loves value too. 

The post I’ve just screened the FTSE 100 for Warren Buffett-type stocks and this is what I found appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

Chemicals brothers

Croda International (LSE: CRDA) is not exactly a household name, but this speciality chemicals company deserves respect among investors as its share price has climbed 98% in the past five years, almost doubling investors’ money. That compares to growth of just 12.2% across the FTSE 100 as a whole. This is a real market-beater.

The momentum continues, with its share price up almost 10% year-to-date. There is one hitch. Success comes at a price, in this case a forecast valuation of 25.2 times earnings. A figure of 15 is usually seen as fair value here. Croda ain’t cheap.

Catch 2

There is another catch. It has a low yield, just 2%, covered twice by earnings. Basically, all that share price growth has driven up the valuation and driven down the yield. Management has still been generous with shareholders, making good use of the 57% rise in free cash flow last year to £155.4m. This helped fund a 7.4% hike the full-year ordinary dividend to 87p, announced in February, and a £150m special dividend of 115p per share.

My colleague Royston Wild has been impressed by Croda’s restructuring strategy and reckons this is the type of company that could sail through global economic storms. Earnings per share (EPS) are forecast to grow 5% this year and 7% next, making it one of the more solid propositions that I’ve cast my eyes over lately.

Micro magic

My other pricey pick is UK tech champion Micro Focus International (LSE: MCRO), whose share price is up a stomping 140%, measured over five years. It is up a whopping 55% over the last six months, which makes it one of the top momentum stocks on today’s FTSE 100, but there’s a reason for that.

Micro Focus issued a profit warning a year ago, which halved its share price from above 2,000p to around 950p. So most of the recent surge has been clawing back those shock losses. At today’s 1,975p, the recovery may now be complete.

Keep your Focus

It is always risky jumping late onto a bandwagon, especially with analysts ringing alarm bells about the global economy. The £8bn group trades at a dizzying valuation of 27.5 times earnings, but that is set to change. With the group’s EPS forecast to rise a barnstorming 138% this year, the forward valuation shrinks to a more reasonable 12.1 times earnings.

You get decent income as well, with a forward yield of 4.2% and cover of 2.1. Operating margins of 32% and a return on capital employed of 57.2% look tempting to me.

Out of the ordinary

As Rupert Hargreaves recently pointed out, Micro Focus has lavished investors with special and ordinary dividends and is dishing out a further $1.8bn following the $2.5bn sale of its SUSE business to Swedish buyout group EQT Partners. It knows how to show investors a good time.

I think Micro Focus merits further attention. Although maybe we have missed the best of the recent share price surge.

The post These 2 double-your-money FTSE 100 stocks just keep on climbing appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Micro Focus. 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.

Low Standard

Its stock is down around 2% today after publication of its 2018 final results, despite group chief executive Bill Winters hailing “significant improvement in profitability driven by higher quality income growth with cost and asset origination discipline.” He also bigged up the “tremendous progress securing the foundations of the business since 2015,” resulting in a third successive year of underlying profit growth.

There are plenty of positive numbers, with operating income up 5% to $15bn and $3.2bn in gross cost efficiencies, exceeding the target set in November 2015. Net interest income increased 8% while credit impairment fell 38% to $740m. Underlying profit before tax rose 28% to $3.9bn.

Chartered waters

Standard Chartered also strengthened its balance sheet, lifting its CET1 ratio 60 basis points to 14.2%, which should boost its resilience to economic shocks. There could be plenty of those amid fears of a global recession, with China and Asia particularly vulnerable, and the US trade war that has been hurting for some time.

Basic earnings per share increased 14.2 cents to 61.4 cents, and the board rewarded loyal investors by hiking the final dividend 36% to 15 US cents. Standard Chartered now offers a forecast yield of 3.6% with cover of 2.8. It still trades at a bargain price of 9.7 times forecast earnings, which looks promising with forecast earnings growth of 20% in 2019, and 11% the year after.

Like every bank, Standard Chartered remains a work in progress and is also vulnerable to wider economic troubles. However, my colleague Roland Head reckons its recovery could have further to run.

Chemicals reaction

Speciality and industrial chemicals manufacturer Croda International (LSE: CRDA) has had a solid year, rising almost 12% in 12 months, against just 1.8% across the FTSE 100 as a whole. Over five years, it’s up 100%.

Today, it published its results for the year ended 31 December 2018 and the stock fell 3% in response as pre-tax profits rose just 1% to £317.8m, with revenues also up 1% to £1.39bn. Core business sales were 3.8% higher at constant currency at £1.27bn. But it was hit by adverse FX movements, as currency translation reduced sales by £26.2m and adjusted pre-tax profit by £8.7m.

It did grant investors a special dividend of 115p per share, totalling £150m, alongside a 7.4% increase in the full-year ordinary dividend to 87p. Croda is a relative low yielder at 1.9% with cover of 2.1 but at least management policy is progressive. It could also deliver growth over the long term.

Front Foots

Chief executive officer Steve Foots hailed “another year of strong progress” as Croda once again delivered “top line growth at industry leading margins to achieve superior returns.” He also highlighted “relentless innovation and by investing in disruptive technologies and exciting new growth opportunities,” although our old friend “challenging global market conditions” also got a mention. 

Croda looks a bit expensive, though, trading at 24.7 times forecast earnings, with a PEG of 3.1. Forecast earnings growth nonetheless looks steady at 8% in both 2019 and 2020, and a return on capital employed of 34% suggests a well-run operation.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Standard Chartered. 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.

Even in times of growing stress on the global economy, Bunzl has been able to keep the bottom line growing. So, with signs of economic conditions worsening across its key European marketplace, and fears rising of a potential US slowdown as soon as late 2019, it will be interesting to see what the company has to say for itself when it releases full-year results on Monday.

A lifeboat in troubled times

It certainly appears that the broader market is confident the business can deliver another set of solid results. It’s why the company’s share price has printed record high after record high in recent weeks and a burst through the £25 per share marker has taken gains since the seven-and-a-bit weeks from New Year’s Day to 7%.

It’s no surprise to see share pickers flocking to Bunzl in uncertain times like these. Of course, the support services economy is geared to the health of the broader global economy. But thanks to the broad choice of services that it offers to a variety of sectors, and the market-leading positions it has in many of these areas, it offers strength against any shockwaves through its diversity.

What’s more, through its increasingly-aggressive quest for acquisitions, Bunzl is reinforcing its base for long-term profits growth. M&A is always a risky business, of course, but the company has proved it has an eye for great earnings-enhancing purchases, as well as a splendid track record of their successful integration into the broader group.

City analysts certainly aren’t perturbed and they expect Bunzl’s long-running profits story to continue in 2019 with a 5% rise, and another 3% advance is predicted for next year. A subsequent forward P/E ratio of 19 times may make it a tad toppy on paper, though I would consider its proven resilience in difficult times  makes it worthy of such a premium.

Get your chemicals fix

Croda International (LSE: CRDA) is another Footsie-quoted share expected to sail through the stormclouds gathering over the world economy and keep growing earnings (by 8% in both 2019 and 2020, to be exact).

And, like Bunzl, the chemicals giant will also be one to watch in the coming days — full-year financials are slated for Tuesday. Restructuring of its Personal Care operations continues to deliver the goods and, as a consequence sales of new products here, grew by double-digit-percentages in the third quarter, Croda advised back in November. And broader efforts to expand its core continue to pay off as well, pushing constant currency revenues across these essential operations 4.5% higher in the three months.

Now Croda also doesn’t come cheap, as reflected by its prospective P/E ratio of 24.5 times. Given the ongoing success of its restructuring strategy, though, and the possibility of sustained profits growth beyond the medium term, I consider such a premium fitting for this particular stock.

The post Earnings alert! 2 FTSE 100 growth stocks I’ll watch next week appeared first on The Motley Fool UK.

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Royston Wild owns shares of Bunzl. The Motley Fool UK has no position in any of the shares mentioned. 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.

Companies like Associated British Foods (LSE: ABF), the sugar-to-retail business best known for its Primark chain of clothing stores.

Five-year lows

ABF has churned out a consistent record of earnings growth over the past decade, increasing earnings per share (EPS) by an average of 9% per annum. Its diversification has helped contribute to this record. 

For example, at the beginning of September ABF reported that better than expected performance at Primark, which accounts for 54% of group profit, will help the company meet full-year growth expectations, despite a slowdown at its sugar division. 

City analysts are expecting EPS growth of 8.3% for 2018, giving a forward P/E of 17.4. This multiple is right at the top of what I would consider appropriate for a business like ABF, although it is significantly below the five-year average, which sits at around 25. What’s more, the company has a tremendous record of dividend growth. Over the past five years, the payout has increased at a steady 8% per annum and is covered three times by EPS, giving a wide margin of safety. 

With this being the case, even though the stock only yields 1.9%, I believe ABF is a great income play.

I am optimistic about the outlook for Croda (LSE: CRDA) for a similar reason. While the stock might not support the highest dividend yield on the market, the payout is well covered by EPS and the firm has a robust balance sheet. 

Analysts expect Croda to distribute a payout of 88p per share for 2018, implying a dividend yield of 1.9% is on offer. Dividend cover of 2.2 tells me that there is plenty of room for dividend growth here as well. Over the past five years, the payout has grown at an average rate of 6% per annum, and as Croda’s EPS continue to expand, I believe this trend will continue.

The one thing that I’m wary about here, however, is valuation. The stock trades at a forward P/E of 24.5. Would this stop me buying? It is high but I think it is justifiable because, as a speciality chemicals business, the company has a substantial competitive advantage that is unlikely to be disrupted any time soon. I am happy to rate the stock as a ‘buy’ at this level for that reason.

Sticky income

The final company that has attracted my attention is Sage (LSE: SGE).

What I like about this accounting software provider is that revenues are relatively sticky. Companies and sole traders don’t tend to switch accounting software often, giving Sage a predictable, recurring income stream. 

Based on current City growth estimates, shares in this business are trading at a forward (2019) P/E of just 15.7, which is high, but it’s a multiple I am prepared to pay given the sticky nature of sales. The multiple is also below the five-year average of around 20.

On top of the steady earning streams, the firm also has a record of steady dividend increases for investors. The payout is up 70% over the past five years and at the current level is covered twice by EPS, leaving plenty of room for further growth. After recent declines the dividend yield has spiked to 3%, the highest level for the stock in several years.

The post 3 FTSE 100 dividend stocks I’d buy and hold forever after the market slump appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Associated British Foods and Sage Group. 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.

To be honest, predicting the economic impact of Brexit is above my paygrade. But I think it’s fair to say that there’s a possibility of some disruption to the UK economy. With this risk in mind, I’ve been screening the FTSE 100 for companies which should be a safe buy, even in an economic storm.

Mine’s a double

Spirits giant Diageo (LSE: DGE) may not be the most original choice, but there are good reasons why this £64bn firm is a favourite with investors in defensive, high-quality stocks.

The group’s top brands include Johnnie Walker, Smirnoff, Captain Morgan and Guinness. Net sales totalled £12.2bn last year, about two-thirds of which were made outside Europe. Diageo’s brands range from mass market to super premium, so although demand for premium drinks might weaken in a recession, the company would almost certainly pick up this lost trade through its more affordable offerings.

Management’s relentless focus on brand-building translates into high profit margins and strong cash generation. The group reported an operating margin of 30% last year and converted more than 80% of its earnings into free cash flow. This provides solid support for the dividend.

The right time to buy?

In a trading update today, Diageo confirmed that it’s on track to increase profit margins by 1.75% over the three-year period to 30 June 2019. Sales are expected to rise by “a mid-single digit” percentage this year, in line with last year’s performance.

Looking ahead, the shares trade on a 2018/19 forecast P/E of 21, with a prospective yield of 2.6%. That’s not cheap, but the shares have pulled back by 10% from the all-time highs seen in July. I think this could be a decent time to buy more for a long-term holding.

Even better than booze

Diageo has delivered a solid 9% gain over the last year, a period when the FTSE 100 has been largely flat. But specialty chemicals group Croda International (LSE: CRDA) has performed much better, rising by 35% over the last 12 months.

This outperformance stretches back to 2010, since when Croda shares have tripled in value. About half the group’s profits come from its personal care division, which produces ingredients used in products such as cosmetics. The remainder of the group’s profits come from a mix of healthcare, agricultural and industrial products. About two-thirds of sales come from the Americas and Asia, with the remainder taking place in Europe.

Super profits

A tight focus on specialist products where Croda can develop a competitive advantage means that this is a highly profitable business. Last year, the group’s operating margin and its return on capital employed were both 23.7%.

This high level of profitability means that the company generates a lot of free cash flow and has been able to expand without needing much debt.

Of course, such a high-quality business comes at a price. Trading on a forecast P/E of 27 and with a prospective yield of just 1.7%, Croda is more expensive than Diageo.

This is a company I’d like to own, but I’d prefer to wait for a market dip to secure a more attractive buying price. However, for investors seeking a long-term defensive position, I wouldn’t rule out buying today.

The post Why FTSE 100 stock Diageo could be the perfect way to Brexit-proof your portfolio appeared first on The Motley Fool UK.

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Roland Head 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.