A drink and a smoke: Diageo plc and British American Tobacco plc could be just the kick your portfolio needs
Everybody's portfolio needs a little stimulation from time to time. A drink, maybe a smoke, if that's your thing. These two stocks could be just the kicker you need.
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Straight, no chaser
Spirits giant Diageo(LSE: DGE) is still suffering from a mighty hangover that was acquisition-hungry former chief executive Paul Walsh's legacy. He was wise enough to bail out before the party came to an abrupt halt, leaving successor Ivan Menezes to develop a more sober strategy. Unfortunately, Diageo no longer packs the punch it once did, as it battles against headwinds such as the Chinese crackdown on gift-giving, the wider emerging market slowdown, and slippage in North American sales.
Falling revenues mean that Diageo still trades at a pricey 21 times earnings, despite its straightened circumstances. The dividend is better than it was, and investors will have raised their glasses to the recent 5% hike in the interim payout to 22.6p a share, but it hardly excites at 3%.
On the upside, three years of falling earnings per share (EPS) are likely to reverse in the year to 30 June 2017, with forecast growth of 9%. This is primarily due to Diageo's cost-cutting plans: forecast revenues of £11bn are way down on the near-£16bn investors were toasting in the year to June 2015. I may sound flat on the stock but I'm not as it has a strong portfolio of global brands and improving growth prospects, so now might be the perfect time to add a splash to your portfolio.
Slow burner
British American Tobacco(LSE: BATS) is due a bad run but there's little sign of that happening, with its upwards share price surge lasting for a decade or more. Defensive in bad times, the stock also manages to put on a fine attacking display during the good times. It's up 54% over the last five years, and will have TRIPLED your money over the last decade, and that's without taking into account its dividend.
Top dividend investor Neil Woodford knows a great income/growth play when he sees one and he's a long-term fan, with good reason. Although the current yield is a relatively modest 3.66% the main reason is that the share price has been growing so rapidly that even a progressive board struggles to keep up. In February, it showed willing by increasing the dividend by 4%.
British American Tobacco's recent strong growth has come despite currency headwinds, which reduced organic revenue growth of 6.1% at constant exchange rates to just 1.7%. Although smoking is a dying market and I'm not convinced that vaping will come to its rescue, British-American Tobacco is offsetting that by expanding its market share and successfully promoting its premium brands. It isn't cheap at 20 times earnings but unlike Diageo, recent performance has justified its valuation.
Future prospects are promising with forecast earnings per share growth of 12% and 8% over the next couple of years. If you buy both these stocks, you combine the heady prospect of a recovery play with the intoxicating aromas of a company that's already there.
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Harvey Jones has no position in any shares mentioned. 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.
