Kier Group is one of the most shorted stocks on the London market. Investors are concerned by the high levels of debt that the company is carrying and are fearful of the ongoing tough market conditions. In the construction industry, margins are being squeezed and there are concerns over Brexit. I’ve long felt buying shares in Kier Group would be an unwise move.
Other investors feel the same. Kier’s share price has slumped by 87% in the past year.
Instead, I would look to back Diageo (LSE: DGE) with my money. As I have written before, I like consumer goods companies. I believe investors should never underestimate brand loyalty, especially when it comes to frequent-purchase items. In good times or bad, I have faith that a well-run business of this type should prosper.
What do I think of Diageo?
Over the past year, the share price is up by 24%, making the price-to-earnings ratio 24. The prospective dividend yield is just above 2% so some may think this makes the shares look expensive. But I heed Warren Buffett’s advice about buying a wonderful company at a fair price, rather than a fair company at a wonderful price. Does Diageo fall under this description?
The business is behind the global drinks brands such as Guinness, Tanqueray and Bailey’s. Its global outreach and strong portfolio mean that Diageo can command a strong price for its products, which was reflected in its interim results, released in July, where operating margins were reported at 32%.
It is certainly one of the darlings of the London stock market. Investors seem to love its reliability and product range. This is evidenced by looking back over the past five years. In this period, the company’s share price has increased by 80%, whereas during the same time, the FTSE 100 has increased by only 15%. Of course, we can’t predict the future by looking at past results.
What gets me excited the most is the potential £4.5bn share buyback, announced in August, which Diageo hopes will proceed over the next three years. In times of wide-spread market uncertainty, I would like to think that the buyback could preserve, or indeed increase the share price. It could also indicate that Diageo thinks its shares are undervalued.
In a volatile market, it may be that the high price-to-earnings ratio the company carries is because the stock is seen as steady. In theory, if the market changes and the geopolitical landscape becomes more predictable, investors could look to put their money elsewhere, which would lower the Diageo share price.
Although the company’s growth might be slow and steady, I see this as a good thing. Sustained growth always wins the race for me. Add to that a splash of customer loyalty, and I think Diageo could be a winning stock.
I’ll drink to that!
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T Sligo has no position in any of the shares mentioned. 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.
Motley Fool UK 2019