Diageo (LON: DGE) (DGE.L) released its preliminary results for the year ended 30th June last Thursday and the numbers were excellent.
• A 15% increase in reported net sales to £12.1bn.
• A 25% increase in operating profit to £3.6bn.
• A 4.3% rise in organic net sales growth.
• An 18% increase rise in basic earnings per share to 106p.
• A rise in free cash flow of £566m.
The company increased its dividend by 5% to 62.2p, and also said it would commence a £1.5bn share buy-back programme during FY2018. Chief Executive Ivan Menezes commented “Diageo is a strong company today and we are confident in our ability to deliver sustainable growth.”
The market took the results very well, with the shares surging 7% to an all-time high. The stock is now up around 25% since early December.
So does the company offer any value right now from a dividend perspective?
In my view, no.
Diageo has an excellent dividend growth track record, having raised its dividend payout from 32.7p to 62.2p over the last decade, a compound annual growth rate (CAGR) of a robust 6.6%. However, the recent rise in the share price has pushed the current yield down to just 2.5%, which is a little underwhelming in my view.
Furthermore, with City analysts forecasting FY2018 earnings of 114.8p, the stock now trades on a forward looking P/E ratio of 21.3. While that’s not an outrageous valuation given the company’s consistent track record and growth prospects, it doesn’t leave a huge margin of safety, in my view.
I already hold Diageo in my personal dividend growth portfolio and I plan to hold the stock for the long term, topping up my holding on a regular basis. However, I’ll be looking to top up when sentiment is low, and the stock’s yield rises to around 3% or higher. That will obviously require patience, but I’m sure the opportunity will present itself at some stage.
Disclosure: Edward Sheldon, CFA owns shares in Diageo.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.