I think this high-quality FTSE 100 share is attractive. The recent falls in the stock market have thrown up some interesting opportunities. There are some big dividend yields available from stable and defensive companies. And some firms with fallen share prices won’t likely suffer as badly in any coronavirus-induced recession that may follow.
Premium spirits
The FTSE 100’s Diageo (LSE: DGE) supplies premium-branded alcoholic drinks around the world. It’s a great, cash-generating business. And, over the years, the shares have become prized by investors.
On 26 February, the company released a trading update about the impact of the Covid-19 outbreak. In Greater China and the Asia Pacific region, the directors expect a hit to on-trade sales in bars, restaurants, coffee shops, clubs, hotels and other places. But they reckon revenue could gradually improve through the fourth quarter of 2020.
Organic net sales will likely fall between £225m and £325m in the region and organic operating profit between £140m and £200m. To put that into perspective, sales from the region were around £5,356m last year. So the maximum estimated reduction to total sales from the region is about 7%.
However, revenue from the Asia Pacific region, including China, is running at just 26% of overall revenue. At the time of the update, the directors hadn’t ruled out sales weakness from other trading geographies. But they didn’t mention sales destined for home consumption. I’m assuming the pandemic won’t much affect the turnover from retail sales reaching the end-customer via shops, supermarkets and other outlets.
Restrictions on social gatherings could bite
We know now that the UK and other governments have either encouraged or enforced restrictions regarding people meeting in places served by the hospitality sector. So I’m estimating that further reductions in sales from hospitality premises will end up affecting more of its overall revenue outside the Asia Pacific.
However, for me, the key takeaway from Diageo’s update is that the damage will be temporary. Maybe lasting for approximately the rest of 2020 and likely limited to on-sales only.
The update contains a positive note about the outlook. The directors are “confident” in the growth opportunities for the business in Greater China and the Asia Pacific region. The firm will continue to invest in its brands to make sure it’s “strongly positioned” for the recovery in consumer demand the company expects.
The valuation attracts me now
Meanwhile, with the share price near 2,519p, it’s still around 23% down from its position in mid-January, despite bouncing back a bit over the past couple of days. And, at this level, the forward-looking dividend yield for the trading year to June 2021 is around 3%. I think the valuation is attractive.
You’re never going to see a quality business like this selling at a bargain-basement valuation. But Diageo has rock-solid defensive credentials and a long record of incremental growth in revenue, earnings, cash flow and shareholder dividends.
I think the stock is a great candidate for a long-term hold. And it could become a decent compounding machine within a balanced and diversified portfolio of similar holdings.
