I think Diageo (LSE: DGE) is a perfect FTSE 100 pick for those seeking sustained long-term profits growth. That’s even though recent data suggests that younger generations are drinking less than their predecessors. A Berenberg report in 2018 showed that teenagers and people in their early 20s are consuming lower amounts of alcohol than millennials.
I feel that Diageo can prosper despite this threat for a number of reasons. One of them is the brand power of its products like Captain Morgan rum, Guinness stout and Smirnoff vodka. These are the sort of heavyweight labels in which the FTSE 100 firm has the resources to turbocharge investment to keep growing market share.
Ready to go
There’s also the fact that Diageo is exceptionally effective and rapid when it comes to embracing new consumer trends to keep the bottom line moving. Product development in the field in premium-priced drinks has paid off handsomely in recent years. The company’s also taking steps to clutch the fast-growing ‘ready to drink’ alcoholic beverages market.
Industry analysts over at ING Bank note that this market “has seen significant growth over the last few years driven by consumer demand for more convenience and healthier alternatives”. It says the ready-to-drink segment grew at a compound average rate of 8% in the five years to 2019. This is better than the 5% rise that the broader alcoholic beverages market experienced over the period.
Yet ING says that the ready-to-drink sector still accounts for just 2% of the total alcohol market today. This gives FTSE 100-quoted Diageo plenty of room to exploit. Market intelligence body The IWSR thinks that the ready-to-drink market will grow by 41% between 2019 and 2024.
A stress-free FTSE 100 share
It’s no surprise in my opinion that City analysts think Diageo’s going to snap straight back into earnings growth after last year’s bottom-line reversal. Current forecasts suggest that earnings will rise 3% and 11% in the fiscal years to June 2021 and 2022 respectively.
These bright forecasts — along with the company’s robust balance sheet — mean that Diageo’s long record of lifting dividends each year is expected to continue. Consequently the FTSE 100 share has yields of 2.4% and 2.5% for this financial year and next.
It’s worth mentioning that the drinks maker’s shares don’t come cheap. At current prices around £29.80 per share Diageo trades on an elevated forward price-to-earnings (P/E) ratio of 31 times. Such high valuations could lead to a sharp share price correction if the firm’s projected growth trajectory starts to look a little wobbly.
That said, I believe that Diageo’s shares are worth such a heady premium today. I myself bought the company for my ISA because of its leading position in many major drinks categories across the globe. In my opinion, it’s a good stock for investors like me seeking robust long-term shareholder returns, despite the high price and risk of declining alcohol consumption in some markets.
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Royston Wild owns shares of Diageo. 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.