Drinks manufacturer Diageo (LSE:DGE) has long been one of the FTSE 100’s most reliable dividend shares. For more than 30 consecutive years the company has lifted the annual payout, a record that’s a testament to the strength of its market-leading brands.
The Guinness and Captain Morgan maker has fallen out of favour with investors this year however, as cost pressures have mounted and trading conditions have worsened. Last month it shocked the market by cutting its sales and profits guidance due to trouble in Latin America and this remains a risk.
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However, I still think it’s one of the most attractive dividend growth shares out there. Here’s why.
1. Dividends tipped to keep rising
City analysts are expecting annual earnings to stage a rare reversal in this financial year (to June 2024). Yet the number crunchers still think shareholder payouts will keep rising — an 81p per share payout is predicted, up from the 80p it paid out last year.
Dividend growth is tipped to accelerate in fiscal 2025 too, resulting in a forecast of 85.1p per share. Predictions are helped by brokers’ estimates for annual earnings to rise 9%, bouncing straight back from this year’s expected 7% fall.
2. Impressive yield
So far this year, Diageo’s share price has dropped 22% in value. It’s a descent that has, in turn, driven the company’s short-term dividend yields above historical norms.
Indeed, the FTSE company’s forward yield sat at around 2.1% this time last year. Today it sits at a much meatier 2.9%. And for FY25 the business yields a better 3%.
As we can see from the chart below, Diageo also offers better yields than almost all of its industry rivals for this year.
Chart created with TradingView
Its forward yield sails above those of Brown-Forman and Constellation Brands (shown in yellow and pink, respectively), while it also beats those of Heineken (green) and Molson Coors (white). Pernod (blue) offers an identical yield of 2.9%.
3. Robust forecasts
Of course dividends can’t be guaranteed. But Diageo looks in great shape to deliver the payouts analysts are expecting for its shares. The same can’t be said for many other FTSE 100 shares as the global economy cools.
First, predicted dividends for the next two years are covered between 1.9 times and 2 times by expected earnings. This provides a wide margin of error should profits estimates be blown off course.
Diageo also has strong and reliable cash flows it can use to keep growing dividends, if required. Its decision to repurchase a further $1bn of its shares by the end of its year underlines its financial robustness.
On top of this, the company’s net debt-to-EBITDA ratio stood at 2.6 times as of June. This was at the lower end of its targeted range of 2.5 to 3 times.
A top dividend stock
I’ve already used recent price weakness as an opportunity to top up my Diageo holdings. And despite its current trading troubles I’m seeking to buy more. I believe it still remains one of the greatest dividend growth stocks on the FTSE today.
