Are Diageo and Compass the best FTSE 100 stocks to buy today?
If you'd invested £10,000 in each of drinks giant Diageo (LSE: DGE) and caterer Compass Group (LSE: CPG) 10 years ago, your investment would be worth £68,000 today, plus dividends. That's a potentially life-changing gain.
In contrast, a £20,000 investment in the FTSE 100 10 years ago would be worth just £25,324 today, plus dividends.
These profitable and defensive businesses have been an excellent investment during the years since the financial crisis. Do they still deserve a 'best buy' rating today?
A mixed set of figures
Compass Group is the world's largest catering outsourcing firm. Its operations range from canteens in remote mine camps to school dinners. It operates in 50 countries on more than 55,000 client sites.
This diversity has helped to smooth over downturns in specific sectors, such as offshore oil. However, the firm's shares fell by 5% on Wednesday morning, after its half-year figures showed a period of flat performance.
Revenue for the period fell by 0.8% to £11.3bn, while operating profit was 2.7% lower, at £853m. Earnings edged 0.5% higher to 37.7p per share.
In fairness, revenue growth would have been much higher except for unfavourable currency movements. Underlying revenue rose by 4.8%, while underlying operating profit was 4.5% higher, at £875m.
Organic revenue rose by 7.3% in the North American ops and by 3.4% in the Rest of World. The weakest performance was in Europe, where organic revenue only rose by 0.5%. Management expects this to improve during the second half, when efficiency gains should help to boost profits closer to home.
Time for a tasty bargain?
Expectations for full-year profits have been left unchanged. With the shares trading at just under 1,500p at the time of writing, this puts Compass on a forecast P/E of 19.6, with a forward dividend yield of 2.4%.
I think this is probably fair value. Long-term investors could keep buying, but personally this is a stock I'd buy on any market dips.
This could be a forever stock
Spirits group Diageo has also suffered from adverse exchange rate movements. But despite this, operating profit rose by 6.1% to £2.2bn during the six months to 31 December. That gives the group an operating profit margin of 33.8% on £6.5bn of sales.
These super-high profit margins are one of the reasons why this stock is so popular with investors. High margins help to generate free cash flow, which was just over £1bn during the first half.
Measured over the last 12 months, free cash flow is about £2.6bn. That gives the stock a free cash flow yield of nearly 4%. That may not seem much, but it shows that the group's 2.5% dividend yield is covered by surplus cash. This is a key attraction for long-term investors wanting a reliable income with good growth potential.
Would I buy Diageo today?
Diageo stock has climbed nearly 10% over the last three months and is now close to an all-time high, at about 2,660p. The shares trade on about 23 times earnings with a forecast yield of 2.5%. Although that's not cheap, history suggests this company will continue to deliver positive returns for investors.
I'd buy today and use any market dips in the future to average down. This is a stock I'd hold forever.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group and 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.
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