Are Diageo plc, British American Tobacco plc And PZ Cussons plc The Perfect Stocks For 2016?

Photo: Diageo

With stock markets having been volatile in 2016 and looking as though that trend will continue, many investors are seeking out companies that offer reliable growth prospects. One such company is British American Tobacco(LSE: BATS). With demand for tobacco products being highly inelastic, the company offers a wide economic moat and robust earnings during even the most uncertain of economic outlooks.

Allied to this is British American Tobacco's dividend prospects. As a very mature company operating within a mature industry, it can afford to pay out a high proportion of earnings as a dividend because it doesn't require major reinvestment. As such, British American Tobacco has a yield of 4.3% at the present time, with dividends likely to rise rapidly in future due to the company's upbeat earnings growth outlook.

Furthermore, with British American Tobacco trading on a price-to-earnings (P/E) ratio of 17.2, it continues to offer good value for money at a time when many global consumer plays are trading on P/Es of over 20.

Buy for the long haul

Investors are also looking out for companies that offer diversity in 2016 so as to lessen the impact of disappointment in one region or one product category. On this front Diageo (LSE: DGE) scores highly since it has exposure to the major markets of the world, with weak performance in one region having the potential to be offset by strong performance in another.

Diageo also offers a wide range of brands within different alcoholic beverage categories. For example, it has stout, vodka, whisky and tequila brands, as well many other types of drinks and this means that it's relatively well-placed to overcome sudden changes in consumer tastes.

With Diageo's shares having fallen by 3% this year, it now trades on a P/E ratio of 20.2. While this isn't particularly low, it's relatively appealing when its competitors have traded much higher. And with Diageo having the potential to be a bid target due to the prospect of sector consolidation, now could be a good time to buy it for the long haul.

Risks and rewards

Meanwhile, consumer goods company PZ Cussons(LSE: PZC) also offers a diverse range of brands and is a high quality operation. However, it continues to struggle with its focus on Africa's largest economy, Nigeria. While it has huge long-term potential, Nigeria is currently experiencing a challenging economic period and this is hurting PZ Cussons' profitability. For example, its bottom line flatlined in the last financial year and is due to rise by just 3% in the current year.

However, with PZ Cussons trading on a P/E ratio of just 12.6 following its share price fall of 20% in the last year, it now offers a much more appealing risk/reward ratio than it has done in the past. Therefore, for investors who can live with the potential for disappointing short-term performance and high volatility, PZ Cussons could prove to be a strong long-term buy.

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Peter Stephens owns shares of British American Tobacco. The Motley Fool UK owns shares of PZ Cussons. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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