Are these FTSE 100 dividend stars getting too expensive?

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Diageo whisky bottles

It's never easy to judge when a quality blue-chip business is simply too expensive to buy. Such businesses rightly command premium valuations and not infrequently beat City earnings expectations.

At times you can be left kicking yourself for not buying at what seemed like a too-expensive price only for subsequent events to reveal that the valuation was quite reasonable. However, hindsight is a wonderful thing and I believe that being disciplined about valuation pays overall.

With this in mind, I'm looking today at whether two FTSE 100 dividend stars are now too expensive.

Qualities

Diageo(LSE: DGE) is a company I've admired for many years. This global drinks behemoth has just about everything an investor would want in a core holding in a portfolio.

It's a defensive business as economic cycles have little impact on alcohol consumption. It owns a host of valuable spirits brands, including Johnnie Walker whisky, Smirnoff vodka and Captain Morgan rum, as well as the powerful Guinness brand. And it's widely diversified geographically, including in emerging markets where rising disposable incomes are a long-term driver for growth. These qualities have provided the company with reliable, growing cash flows and enabled shareholders to enjoy a long, unbroken record of rising dividends.

Yield yardstick

Of course, even the best companies go through periods of insipid earnings performance and that's been the case with Diageo in the last few years. However, earnings are now set to accelerate again -- helped by favourable exchange rates -- and the market has pushed the shares up to a new all-time high of 2,370p, as I'm writing.

City consensus forecasts for the company's financial year ending 30 June give a P/E of 22.5 on the back of anticipated year-on-year earnings growth of 18%. Further growth of 8% forecast for the coming year brings the P/E down to 20.7, but this is still towards the higher end of its historical range. Meanwhile, the forward dividend yield of 2.6% is around a percentage point lower than that of the market as a whole.

Buying Diageo when its yield is closer to the market average has been a good strategy over the years. As such, I believe holding off for a dip in the shares could be a profitable position to adopt at present.

New record year

Asked to name a FTSE 100 financial stock, I imagine few people's first thought would be St James's Place(LSE: STJ). This wealth management group graduated to the top index in 2014 and currently ranks at number 75.

The rise of cheap, execution-only broker platforms hasn't stopped its relationship-based and advice-led business model thriving. The company reported another record year of new investments, funds under management and operating profits in 2016. And, like Diageo, its shares are today trading at a new all-time high.

At 1,194p, the current-year forecast P/E is 27.6, falling to 23.1 next year on forecast 19% earnings growth. These are richer multiples than those of the drinks giant, but St James's Place does offer better value on the dividend front. The payout has advanced from 10.6p in 2012 to an expected 39.5p (3.3% yield) this year and 45.65p (3.8% yield) next year.

However, I'm not sure that the dividend, which isn't particularly well-covered by earnings, quite compensates for the elevated P/E. As such, I'd be hoping for a somewhat lower entry point to buy a slice of this business too.

Five best buys

Only one of the two companies I've written about has made the cut for the best five FTSE 100 businesses identified by the Motley Fool's experts in this exclusive FREE report.

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G A Chester has no position in any 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.