Here’s why I’d buy this FTSE 100 dividend growth stock that’s turned £1,000 into £7,000

A bull outlined against a field
A bull outlined against a field

When it comes to producing returns for investors, global drinks giant Diageo(LSE: DGE) stands in a league of its own. Investors in the company, which owns some of the world’s most recognisable alcoholic beverage brands, including the likes of Guinness and Johnnie Walker, have seen the value of their holdings grow by 13.5% per annum for the past 15 years. At this rate of return, an initial investment of £1,000 has grown to be worth £7,300.

It’s not the size of this return that impresses me, but the length. Few other companies on the market have been able to churn out mid-teens annualised returns for investors over the past decade and a half. And I believe Diageo is only just getting started.

Just getting started

Over the past few years, Diageo has been mixed up. New management has set out to cut costs and improve shareholder returns by returning any excess cash to investors. For the 12 months to the end of June, the company returned £1.5bn to investors. Since then, another £2bn share buyback has been announced, on top of the regular dividend yield.

Today, the company has announced the disposal of a portfolio of non-core brands, which will net a further £340m to return to investors. Right now, the yield is a modest 2.4%. Including the cash returned via the buyback, the total investor yield is 3.5%.

I expect this trend of cash returns to continue for the foreseeable future as Diageo reinforces its position in the global beverage market. For the first half of the year, net revenues rose 0.9% to £12.2bn, operating profits increased 4% to £3.7bn, while net income gained 14% to £3bn.

For the full-year, City analysts are forecasting earnings per share (EPS) growth of 18.% to 125p, giving a forward P/E of 22. While this multiple is slightly above what I’d usually be willing to pay for a stock, I think it’s about right for Diageo, considering its world-leading brands, cash returns to investors, and earnings growth. I’d buy the stock on dips from here.

Running out of steam

Another stock that has produced fantastic returns for investors over the past decade is Dart (LSE: DTG). Over that period, shares in the travel business have added around 43% per annum, turning £1,000 into just under £60,000.

Can this rate of return continue? I’m sceptical. For a start, City analysts are expecting the firm to report EPS growth of 30% for fiscal 2019, but they then expect earnings to decline slightly in 2020. As the stock is already trading at a premium to the rest of the UK transport sector, I think it will need to keep growing, or growth investors might abandon the company.

So it looks as if the stock might take a breather next year, although Dart has a history of surpassing expectations. With that being the case, I’m not planning to bet against the business anytime soon. However, I do believe the travel group’s best days are now behind it, and a dividend yield of only 1% is not enough to make this an income play in my book. All in all, I rate Dart a solid ‘hold’ for existing shareholders.

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Rupert Hargreaves owns no share 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.