An airline stock ready to return to the skies

International Consolidated Airlines Group (LSE:IAG) experienced considerable turbulence during the pandemic. The IAG share price took a journey from 668p in January 2020 to penny stock levels, before eventually arriving at 140p today.

The outlook for IAG shares appears rosy to me, with the company likely to benefit from continued relaxations in travel restrictions. According to IATA, 38 of the world’s top 50 travel markets are now open to vaccinated travellers without quarantine — up from 28 just a month ago.

Indeed, this summer, the airline aims to fill 85%-90% of its 2019 capacity. CEO Luis Gallego foresees “significant profits” for 2022. This would mark a positive change in IAG’s fortunes. Last year, the company only managed to cut its pre-tax losses (from £7.8bn to £3.5bn).

At present, I view IAG as one of the cheapest FTSE 100 stocks. Granted, the emergence of a concerning new Covid-19 variant or escalating conflict in Ukraine could derail this hypothesis. Nonetheless, supported by improving financials and a recovering travel market, IAG stock looks like a good long-term buy for me.

A FTSE 100 dividend stock

Asset manager and insurer M&G (LSE:MNG) has one of the highest dividend yields of any FTSE 100 stock at 8.25%. Since it demerged from Prudential in 2019, M&G has delivered strong pre-tax operating profits, namely £788m in 2020 and £721m in 2021.

Other recent achievements include generating capital of £2.8bn in two years and bringing the total value of assets under management to £370bn.

If M&G maintains this performance, I see potential for capital growth for shareholders, in addition to passive income. In my view, this combination makes it a good FTSE 100 stock to beat inflation — currently running at 6.2%.

The firm is not focused on growing its insurance division, which acts as a cash flow bedrock for the business. This could undermine the company’s defensive credentials over time, but I still see value in the M&G share price and bumper dividends.

A Footsie share that consistently beats the index

Drinks giant Diageo (LSE:DGE) has been one of the best FTSE 100 stocks to own over the past five years. Beyond its index-beating returns, Diageo offers investors passive income from its current 2% dividend yield as a bonus.

Diageo delivered an increase in net sales from £11.75bn to £12.73bn for 2021. The company also boosted operating profit to £3.73bn – a 74.6% annual improvement.

Underpinned by intellectual property in an enviable list of brands from Guinness to Smirnoff and a free cash flow in excess of £3bn, the Diageo share price seems to go from strength to strength.

As consumers become more health conscious and possibly reduce their alcohol consumption, there are potential headwinds for Diageo stock. I would still buy it at present, however. My reading of the company’s financials is that demand looks robust.

The post 3 cheap FTSE 100 stocks I’d buy with a spare £1,000 appeared first on The Motley Fool UK.

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• IAG share price vs budget rivals: which airline share looks better value in 2026?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…

Charlie Carman does not own shares in any of the companies mentioned. The Motley Fool UK has recommended Diageo and Prudential. 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.

Today, I want to take a closer look at two of Train’s top holdings. Both are FTSE 100 dividend stocks that have excellent track records of generating shareholder wealth. But are they worth buying right now?

Diageo

Alcoholic beverage group Diageo (LSE: DGE) is a stock that he is clearly bullish on. Indeed, according to Hargreaves Lansdown, it’s currently the top holding in his UK equity fund, with a weight of around 10.2%.

I can see why Train is happy to have a large overweight position in Diageo, as it really is a classic example of a ‘high-quality’ stock. For example, Diageo is a leader in its industry with an outstanding portfolio of brands including Johnnie Walker and Smirnoff. The group also has a fantastic long-term track record of generating growth in sales, profits, and dividends. It also has an excellent return on capital employed (ROCE), meaning that it’s very effective at generating profits for shareholders. Moreover, with significant exposure to the world’s emerging markets, there’s an exciting growth story ahead.

Looking at the investment case for Diageo, I think it’s a brilliant stock to own for the long term. But is it a ‘buy’ right now?

Crunching the numbers, Diageo currently trades on a forward P/E of 22.9. While that’s not a cheap valuation in a traditional sense, I also don’t think it’s outrageous. High-quality stocks that can consistently generate shareholder wealth do deserve to trade at a premium, in my opinion. That said, Diageo shares are within a whisker of their all-time high, so I think it could be prudent to wait for a pullback. I’m sure that with a little patience, 2019 will present opportunities to acquire Diageo at a slightly cheaper price.

Hargreaves Lansdown

Another FTSE 100 stock that Train rates highly is Hargreaves Lansdown (LSE: HL), which operates the UK’s largest investment platform. It’s currently the fifth-largest holding in his UK equity fund, with a weight of 8.3%.

I can see the appeal of owning Hargreaves Lansdown within a portfolio. There’s no doubt that the company is a market leader, as it has over one million clients on its books, and has an investment platform market share of around 40%. The company is also growing at a rapid rate as funds continue to flow in. And with the UK facing a retirement savings crisis, the company looks well-placed to benefit in the next few decades as people save more. 

Should investors buy now? Like Diageo, Hargreaves also trades at a lofty valuation. In fact, it’s more expensive than Diageo as its forward P/E is 32.5. However, I actually think the stock could still be worth a look at that valuation, simply because earnings are growing at such a prolific clip (five-year growth: 58%). Given that the stock has corrected by almost 20% in the last two-and-a-half months, I think that now could be the time to have a nibble.

The post 2 FTSE 100 dividend stocks owned by Britain’s Warren Buffett appeared first on The Motley Fool UK.

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• Prediction: Diageo shares could soar in the next 5 years if this happens…
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• Stock-market crash: 5 lessons from major market meltdowns

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

Unilever

Unilever (LSE: ULVR) which owns a portfolio of over 400 household brands such as Dove, Persil and Domestos is the perfect ‘core holding’ type of stock, in my view. With such a strong portfolio of popular products, the company is able to generate consistent revenues and earnings year after year, and its significant exposure to the world’s emerging markets also provides a compelling long-term growth story.

Unilever has made news headlines recently, as the company was planning to move its headquarters to the Netherlands to simplify its corporate structure. This would have seen the stock drop out of the FTSE 100 Index. However, in good news for UK investors, the firm announced yesterday that it has cancelled the move and that it will be remaining here in the UK.

ULVR shares rarely come cheap as the stock is highly sought after by fund managers and private investors alike, which is no surprise when you consider that the company has compounded its dividends by 8% per year since 1952. It’s a stock to buy on the dips, in my opinion.

Diageo

Diageo (LSE: DGE), which owns an outstanding portfolio of alcoholic beverage brands, such as Johnnie Walker, Smirnoff and Tanqueray is another classic core holding stock that I have no intention selling. Whether the global economy is booming or struggling, you can be sure people will be drinking Diageo’s products and therefore I believe it’s the kind of stock you can buy and forget about. Like Unilever, Diageo also has strong exposure to the world’s emerging markets, meaning that it’s set to benefit as the wealth of consumers in these regions increases over the coming decades.

One thing I love about Diageo is its dividend growth track record. The company may not have the highest yield in the FTSE 100, at 2.6% (estimated for FY2019), but when you consider that it has increased its dividend every year for 20 consecutive years now (by over 500% in total) it becomes apparent the group is a true dividend superstar. It’s another stock to buy on the dips. 

Royal Dutch Shell

Lastly, the largest stock in the FTSE 100 – Royal Dutch Shell (LSE: RDSB) – is another stock I have no intention of selling in the near future. While the world is slowly becoming more ‘green’ and adopting alternative energy sources, a recent trip to the US reminded me just how dependent the world is on oil for transportation. I can’t see that changing significantly any time soon, even if electric cars are becoming more popular.

Two things that stand out to me with Shell are its high dividend yield and its long-term dividend track record. With the company expected to pay a dividend of 188 cents per share this year, the prospective yield is a high 5.4%. That yield is highly appealing in today’s low-interest-rate environment. Furthermore, the company has not cut its dividend since World War II. It even managed to maintain it when oil prices plummeted in early 2016, which is the sign of a well-managed company. With that kind of track record, I’m happy to hold for the long term.

The post 3 FTSE 100 dividend stocks I’ll probably hold forever appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Diageo shares 110 days ago is now worth…
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• Prediction: Diageo shares could soar in the next 5 years if this happens…
• These FTSE 100 stocks are tipped to rise 53% (or more) in the next year!
• Stock-market crash: 5 lessons from major market meltdowns

Edward Sheldon owns shares in Unilever, Diageo and Royal Dutch Shell. 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.

World-class company

From a retirement-investing perspective, there are a number of things I like about Diageo.

For starters, there’s the defensive nature of the business. You see, as a ‘sin’ stock, Diageo is able to generate fairly stable revenues no matter the state of the global economy. If the economy is booming, you can be sure that people will be out drinking. Yet if the economy is struggling, the chances are people will still be drinking to drown their sorrows (they may downgrade from Johnnie Walker Black to Johnnie Walker Red, of course). So, the nature of the Diageo’s business provides a high level of stability and consistency, which is what you want in retirement.

This week’s full-year results are a good example of this. The numbers are certainly not mind-blowing, but they look solid, with organic net sales up 5%, and operating profit up 4%.

Emerging markets exposure

Another attractive feature of Diageo that makes it an ideal retirement stock is its exposure to the world’s emerging markets, which provides a long-term growth story. At present, Diageo generates around 20% of its sales from Asia, and another 20% from Latin America, the Caribbean, and Africa. This means that the group is well supported by macro trends and is very well placed to benefit from the rising incomes of consumers in these regions. The company expects that in the next decade, over 700m more consumers will be able to afford its premium spirits, with 85% of that growth coming from the emerging markets. As those market consumers become more wealthy, Diageo is waiting for them with a selection of premium spirits such as Johnnie Walker Double Black.

Dividend growth

The third attribute of Diageo that I think is highly attractive is the company’s dividend history. Over the last 20 years, the group has increased its dividend every single year, lifting the payout from 11p per share to 65p per share, which equates to an annualised growth rate of over 9%. That’s an outstanding achievement, and exactly what you want from a retirement stock.  

Is now the time to buy?

When I covered Diageo back in late March, the shares were changing hands for 2,360p. At the time, I stated that the shares were “getting close to the point at which they offered value.” However, since then, the shares have surged 20% to 2,830p. Is there any value left now?

That question is a source of much debate. While traditional value investors might tell you that Diageo’s current forward P/E of 22.3 is way too expensive, others believe that Diageo deserves a premium valuation. For example, top-rated UK fund manager Nick Train has stated that “exceptionally rare” companies that can compound their returns steadily for decades, such as Diageo, can justify P/E ratios of “30, 40 or more.”

Personally, I believe Diageo is a company to buy on the dips. The share price doesn’t fall very often, but when it does, that’s the time to buy.

The post Is FTSE 100 champion Diageo the perfect retirement stock? appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Diageo shares 110 days ago is now worth…
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• Prediction: Diageo shares could soar in the next 5 years if this happens…
• These FTSE 100 stocks are tipped to rise 53% (or more) in the next year!
• Stock-market crash: 5 lessons from major market meltdowns

Edward Sheldon owns shares in Diageo. 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.

5% yield

Schroders is a £9bn market cap investment manager, headquartered right here in London. The group offers both asset management and wealth management solutions, and has operations across 20 global locations. Not all investors realise this, but Schroders actually offers two types of shares: voting (ticker SDR) and non-voting (ticker SDRC). It’s the non-voting shares that offer particular appeal, in my opinion, as these shares trade at a lower valuation and offer a higher yield.

From a dividend investing point of view, Schroders ticks many boxes. First, the stock has a strong yield. For 2017, the investment manager declared a dividend of 113p per share, which equates to a trailing yield of 5% on the non-voting shares.

Second, dividend coverage is strong. For 2017, the company generated basic earnings per share before exceptional items of 227p, giving a coverage ratio of 2. That level of coverage indicates that the company can comfortably afford to pay its dividend and that a cut is not likely.

Third, the company has an excellent dividend track record. Unlike many financial institutions, Schroders did not cut its dividend during the financial crisis. Furthermore, dividend growth has been excellent in recent years. The group has now recorded eight consecutive dividend increases, with the payout being increased 45% over the last three years alone.

Yet despite Schroders’ bright dividend prospects, its shares have not escaped the recent FTSE 100 sell-off. Back in January, the non-voting shares were changing hands for around 2,700p. Today, they’re trading under 2,300p. At that price, with a 5% yield on offer, I believe the stock has strong ISA appeal.

Exceptionally rare

“Wake me up when Diageo trades on 45 times earnings” – Nick Train

Another stock worth looking at right now is alcoholic beverage manufacturer Diageo. The £58bn market cap company is one of the largest alcoholic beverage manufacturers in the world and owns an exceptional portfolio of brands such as Johnnie Walker and Smirnoff. Due to the defensive nature of its business, Diageo is one of the most consistent performers in the FTSE 100, but strong exposure to the world’s emerging markets also adds an exciting growth angle here.

Diageo is a stock that is generally in high demand. For this reason, it often trades at a high valuation along with an underwhelming yield. Yet over the last two months, the shares have trended down from above 2,700p to 2,360p as many investors have rotated out of ‘bond-proxy’-type stocks. Today, the shares can be bought on a forward P/E of 20.5, along with a prospective yield of 2.8%. While that’s clearly no bargain, I think the shares are getting close to the point at which they do offer value.

Indeed, according to top UK portfolio manager Nick Train, exceptionally rare companies that can compound returns steadily for decades such as Diageo and Unilever can “readily justify P/Es of 30, 40 or more.” Train believes that a P/E of 20 and thus an earnings yield of 5% is an “attractive proposition for serious investors.” With that in mind, now might be a good time to take a look at the stock for your ISA.

The post 2 FTSE 100 dividend stocks I’d buy for my ISA appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Diageo shares 110 days ago is now worth…
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• Prediction: Diageo shares could soar in the next 5 years if this happens…
• These FTSE 100 stocks are tipped to rise 53% (or more) in the next year!
• Stock-market crash: 5 lessons from major market meltdowns

Edward Sheldon owns shares in Diageo and Unilever. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo and Schroders (Non-Voting). 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.

Diageo

Drinks manufacturer Diageo (LSE: DGE) released full-year results last Thursday and the numbers were received very well by the market, sending the shares up a huge 7%.

Highlights included a significant 15% rise in reported net sales to £12.1bn, a huge 25% increase in operating profit to £3.6bn and a strong 18% lift in basic earnings per share to 106p. Free cash flow rose by £566m and the company said that it will start a £1.5bn share buyback programme during FY2018. Furthermore, the dividend was increased 5%, bringing the full-year payout to 62.2p. Chief executive Ivan Menezes was upbeat, stating: “Diageo is a strong company today and we are confident in our ability to deliver sustainable growth.”

While these results no doubt look excellent, personally I’m not seeing a great deal of value in Diageo shares at present. On earnings of 106p, the stock trades on a P/E ratio of a lofty 23.1, which doesn’t leave a huge margin of safety in my opinion. Furthermore, while Diageo has an excellent dividend growth track record, the current dividend payout of 62.2p equates to an underwhelming yield of just 2.5%.

I already own Diageo shares in my personal portfolio, having bought the stock last year at under 2,000p, and I will be looking to add to that position some time in the future. However right now, the valuation just looks a little too high to warrant buying more shares, in my view.

NEXT

At the opposite end of the momentum scale is fashion and interiors retailer NEXT (LSE: NXT) which has seen its share price drift considerably lower over the last 18 months. After falling from almost 8,000p in December 2015, to just 3,800p today, the stock is now down over 50% – a stunning fall for a company that just a few years ago was considered by many analysts to be in a league of its own.

There’s no doubt that fortunes can be made by purchasing stocks that are heavily out of favour and waiting for a turnaround, but in this case, I’m not so convinced about the long-term investment thesis.  

Yes, the business looks cheap on a P/E ratio of just 8.7. And yes, the stock has a decent dividend yield of 4.2%. However, what concerns me here is the level of competition from new online retailers selling fashionable clothes at very reasonable prices.

In recent years, we’ve witnessed an array of new entrants such as Zalando, Boohoo, Nasty Gal, Pretty Little Thing and Missguided come onto the market, all of which are scrambling for market share. Add in seasoned retailer ASOS, a company that offers an extraordinary selection of clothes and fast delivery, and the competitive landscape certainly looks tough for NEXT. In my view, its economic moat has been breached, and this threatens to derail profitability going forward.

A trading statement in May was poor, with retail full-price sales falling 8%, and City analysts expect earnings to fall around 10% in FY2018 to 396p per share. On top of this, the UK consumer environment remains challenging with wage growth having stalled in recent years. For this reason, despite the low valuation, I’m not interested in adding it to my portfolio right now.

The post Why I wouldn’t buy these two FTSE 100 favourites right now appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Diageo shares 110 days ago is now worth…
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• Prediction: Diageo shares could soar in the next 5 years if this happens…
• These FTSE 100 stocks are tipped to rise 53% (or more) in the next year!
• Stock-market crash: 5 lessons from major market meltdowns

Edward Sheldon owns shares in Diageo. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com and 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.

After more than doubling in price over the last year, has the time now come for growth investors to sell their shares and move on? Let’s take a look at the numbers.

“Another exceptional year”

On the face of it, there appears very little to complain about. 

In 2016, Fevertree’s revenue fizzed 73% to £102.2m with gross profit margins of 55.2% (compared to 51.2% in the previous year). The company recorded excellent growth “across all regions, channels and flavours” with a particularly spirited performance seen in the UK. Here, sales jumped 118% — compared to the 84% acceleration achieved in 2015 — thanks in no small part to superb trading over the festive period. Adjusted EBITDA came in above expectations at £35.8m (a 97% increase on 2015).

While dividends won’t be a priority for nearly all holders, the company also announced a final payment of 4.71p. When combined with its interim payout, this brings the total dividend to 6.25p per share — over double what it was in 2015. As many investors will testify, a rapidly growing but small yield can often be preferable to one that appears overly-generous. The former tends to be indicative of a company in rude health. The latter, on the other hand, may prove unsustainable. Ending the year with £26.9m net cash on its balance sheet, Fevertree looks about as financially sound as businesses come.

All this and the shares fall. How can this be?

As with most star performers, there’s likely to have been some profit-taking going on. That’s perfectly understandable given the company’s wonderful performance over the past couple of years. The decision of co-founder Charles Rolls to move from the position of Executive Chairman to Non-executive Chairman may also have unsettled some.

Possibly the biggest reason however, is that no earnings upgrades were announced. This, when combined with its price-to-earnings (P/E) ratio of 58 for 2017, leaves Fevertree’s shares looking priced to perfection. While its market-leading status and strong branding should give it some protection, I’m concerned by what may happen if and when evidence emerges that rivals — offering cheaper but otherwise similar products — are successfully drawing customers away.

Since expectations tend to be positively correlated with the likelihood of disappointment, I’m left wondering if it may be prudent to take some money off of the table. A superb company? Without doubt. A share worth holding on to in perpetuity? I’m not so sure.

Slower growth, more stability?

Those concerned by the Fevertree’s lack of earnings upgrades but still keen to tap into the relatively resilient drinks industry may wish to move their capital into FTSE 100 constituent, Diageo (LSE: DGE).

With its greater financial clout and larger portfolio of brands (including Baileys, Guinness and Captain Morgan), the £58bn cap is clearly the more defensive choice. Its huge international presence may also be of some comfort to investors concerned by what the triggering of Article 50 could mean for businesses — like Fevertree — that derive the majority of their sales from the UK.

With a P/E of 22 for 2017 and a decently-covered 2.7% yield, those concerned by Fevertree’s vertigo-inducing valuation may find Diageo a more satisfying tipple.

The post Should investors call time on this top growth share? appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Diageo shares 110 days ago is now worth…
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• Prediction: Diageo shares could soar in the next 5 years if this happens…
• These FTSE 100 stocks are tipped to rise 53% (or more) in the next year!
• Stock-market crash: 5 lessons from major market meltdowns

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

With that in mind, here’s a look at two stocks trading at contrasting valuations. One is simply too expensive for me right now, while the other is in my ‘buy zone’.

Diageo

To my mind, Diageo (LSE: DGE) really is the kind of ‘wonderful’ company that Warren Buffett is referring to. Consumers buy Diageo’s products throughout the good times and the bad, and the company has an outstanding record of generating shareholder wealth.

While Diageo has struggled to generate revenue growth in the last few years, I believe its significant emerging markets exposure will be a key driver of shareholder returns over the long term, making it an ideal core portfolio holding.

I have Diageo in my portfolio at present, and I will look to add to my position in the future. However right now, the price is too high for me. Diageo currently trades on a P/E ratio of 25.1, falling to 21.4 for FY2017, and the recent upwards move in the share price has pushed the company’s yield down to 2.6%.

While I acknowledge that Diageo often trades at a premium to the market, these metrics just look a tad expensive to me. I’d prefer to buy the stock under the 2,000p mark, when the yield is at least 3%. Will that be possible this year? In my opinion, it’s highly likely. I believe it’s only a matter of time until we see some market turbulence, and that should bring buying opportunities. As such, I’ll be leaving Diageo on my watchlist for now and waiting patiently for an attractive top-up point.

Greene King

By contrast, shares in Greene King (LSE: GNK) now trade at a level which I believe offers cracking value for those willing to look beyond short-term uncertainty. Investors have dumped the stock recently on the back of Brexit worries and increased cost pressures across the entire hospitality industry. However with the share price now hovering around the 700p mark, I reckon Greene King is a solid long-term buy.

There are several things I like about the pub operator. It’s a simple company to understand, and with over 3,000 pubs, restaurants and hotels across the country, is well-placed to capitalise on the nation’s love of a drink. Furthermore, Greene King is nothing short of a dividend powerhouse, growing its dividend by a compound annual growth rate (CAGR) of 10% since 1980.

The company today reported strong trading over the three-week Christmas period, with like-for-like sales up 4.5%, and LFLs up 1.1% over the 40 weeks to 5 February.

Progress on the Spirit integration continues and management said the company is “well placed to deliver another year of progress, value creation and returns for our shareholders.”

With the stock’s P/E ratio falling to a low 9.8, I’m happy to declare it’s now in my ‘buy zone’. The share price fall has pushed the stock’s yield up to a high 4.6%, so a healthy, well-covered dividend is on offer, at a very attractive valuation.

The post Why Greene King plc is in my ‘buy zone’ but Diageo plc isn’t appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Diageo shares 110 days ago is now worth…
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• Prediction: Diageo shares could soar in the next 5 years if this happens…
• These FTSE 100 stocks are tipped to rise 53% (or more) in the next year!
• Stock-market crash: 5 lessons from major market meltdowns

Edward Sheldon owns shares in Diageo. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

However, in the last month, share price weakness has begun to appear in the defensive segment of the market, and this weakness has been exacerbated in the last week after Donald Trump’s victory in the US election.  

Here’s a look at why companies such as Unilever (LSE: ULVR) and British American Tobacco (LSE: BATS) have all of a sudden lost their shine but also offer good opportunities to buy.

Inflation

With the Trump victory catching many off guard, investors have scrambled to reposition their portfolios in the last few days. Trump has promised to cut taxes and spend heavily on infrastructure and as a result, the market has come to a near-universal conclusion that inflation is likely to surge higher.

Bonds perform poorly in an inflationary environment because their ‘fixed’ interest payments are worth less to investors as inflation rises, so it’s no surprise that bonds have been sold off sharply since last week. However when bond prices fall, their yields rise. That means demand for high-yielding defensive equities, which are often viewed as alternatives to bonds for income-focused investors, can be negatively affected. 

This explains why many defensives have slumped in the last few days. The market has focused on sectors that could benefit from the President-elect’s policies, rotating into cyclical stocks and leaving behind the ‘expensive defensives.’ 

Value appearing

So should you be worried that many key dividend stocks have fallen 10%-15% in the last month? In my opinion, no. Instead, see it as an opportunity.

Many defensive stocks such as Unilever and British American Tobacco have generated excellent returns for their shareholders over the long term so I believe these kinds of stocks make excellent core portfolio holdings.

Demand for such companies will fluctuate over time, depending on market sentiment. However, if you can build positions in high quality defensive companies when they’re offering value, it’s likely you’ll be rewarded over the long term.

Are defensive stocks now offering good value? To my mind, yes.

Take Unilever. Just over a month ago the company was trading at 3,800p. However, after a sizeable 17% fall, the stock can now be bought for around 3,150p. This means that you can now buy the stock with a dividend yield of 2.8% instead of 2.3%, quite a big difference for an income investor. While Unilever’s P/E ratio of 21.3 is still above its 10-year average of 15.1, I’d be a lot more comfortable buying the stock at 3,100p than I would be at 3,800p.

Similarly, a month ago British American Tobacco was trading at 5,100p, yet now can be bought for 4300p. That 16% fall means the company’s dividend yield has risen from 3% to 3.6% and therefore the tobacco giant is now looking a lot more attractive from an income point of view. These are just two and there are many others.

Defensive companies may have further to fall, but if you can capitalise on share price weakness, you should be rewarded over the long term.

The post Why defensive stocks are falling rapidly after Trump’s victory appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Personally, I’m looking to generate long-term wealth through my ISA and as such, I aim to invest in high quality companies that have a strong track record of generating shareholder wealth over time. I look for companies that are leaders in their fields, have geographically diversified revenue streams, strong balance sheets and a history of revenue, earnings and dividend growth.

With that criteria in mind, here are two I believe could make excellent ISA investments.

Diageo

Drinks manufacturer Diageo (LSE: DGE) is a classic ‘Warren Buffett’ type stock to my mind. The maker of Johnnie Walker and Smirnoff is an easy company to understand, sells recession-proof products globally, and is a leader in its field with a strong record of generating shareholder wealth. Furthermore, with significant emerging markets exposure, there’s a long term growth story at play, as the growing incomes and aspirational nature of consumers in these regions should help drive revenue up. It’s little wonder Diageo is such a popular investment with both UK and US investors.

It enjoyed a strong period of growth in the five years between FY2008 and FY2013, with revenues climbing from £8,090m in 2008 to £11,303m five years later. However the last three financial years have been more subdued as sluggish emerging market growth and ‘anti-extravagance’ measures in China have put the brakes on. The company reported revenue of £10,485m for FY2016, down 3% on the previous year, however the good news is that city analysts forecast revenues to continue growing in the near future with consensus revenue estimates of £11,710m and £12,242m for the next two years.

The company paid shareholders dividends of 59p per share for FY2016, a yield of 2.8% at the current share price and analysts expect dividends to grow, with consensus estimates of 63p and 66p for FY2017 and FY2018. It’s worth noting that the dividend has grown at a rate of 8% over the last five years, easily outpacing inflation.

Diageo has enjoyed strong share price momentum since the Brexit vote as investors have rushed to defensive stocks with global earnings. The rise has pushed the P/E ratio to 20.6 times next year’s earnings which, while not an outrageous figure, isn’t cheap. I believe Diageo could make an excellent ISA investment, but I’ll be waiting for a more opportunistic entry point before buying.

Prudential

Insurer Prudential (LSE: PRU) on the other hand, is a quality stock that is trading at an attractive valuation. Why? The insurance sector is out of favour right now due to regulation concerns and Brexit uncertainties, and as such Prudential can be bought for just 11.6 times next year’s earnings. 

The company has a diversified revenue stream, with significant operations in Asia, the US and UK, and provides 24m customers with protection and savings opportunities.

Earnings have more than doubled in the last five years and dividend growth has been excellent at over 14% growth per year in this time. While city analysts anticipate earnings dipping slightly from £1.24 per share in FY2015 to £1.17 for FY2016, they forecast growth to resume in FY2017 with earnings of £1.30.

Prudential is a classic example of a high quality company trading an at attractive price and for investors looking for capital and dividend growth, I believe Prudential could be a good long-term pick.

The post Are these stocks the perfect ISA investments? appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.