Diageo (LON: DGE) released interim results last week, revealing that business is ticking along nicely.
Organic net sales growth rose 4.2%, while organic operating profit increased 6.7%. Dividend investors will be pleased to hear that the company increased its interim dividend by 5%.
Chief Executive Ivan Menezes commented:
“These results demonstrate continued positive momentum from the consistent and rigorous execution of our strategy. We have delivered broad-based improvement in both organic volume and net sales growth. We have increased investment behind our brands and expanded organic operating margin through our sustained focus on driving efficiency and effectiveness across the business.”
So is Diageo worth buying for its dividend right now?
I’m a Diageo shareholder, having bought the shares when they were under 2,000p in late 2016. Yet, to my mind, there’s not much value on offer from the stock at the moment.
With analysts forecasting a dividend of 66.1p per share for FY2018, the prospective yield is currently 2.6%. It’s hard to get excited about that level of yield.
Furthermore, while the share price has pulled back a little this year, the valuation still looks quite rich.
Currently, the forward-looking P/E ratio is 22.1 and the P/E to growth (PEG) ratio is 3.5. This suggests there’s not much value on offer relative to the company’s growth prospects.
I’m bullish on the long-term story here, yet Diageo strikes me as a classic example of the kind of stock Neil Woodford was talking about recently when he said:
“In a challenging global economic environment, the few stocks that are perceived to be capable of delivering dependable growth have, like in the early-1970s, become very popular and that popularity has manifested itself in extreme and unsustainable valuations.”
For now, I’m happy to hold on to my Diageo shares and collect my dividend payments. The prospective yield on my purchase price is around 3.4%. Yet I won’t be adding to my holding at the current valuation – there’s just not enough value on offer, in my opinion.
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.