Investors can be forgiven for wanting to find safe ports in today’s market storms, but it isn’t always easy. When the market is hit by a force 10 gale, there are few protected harbours. Do these three FTSE 100 stalwarts offer you a comfortable berth?
Diageo
I fondly remember spirits giant Diageo (LSE: DGE) in the glory days under acquisition-thirsty chief executive Paul Walsh, when it binged on rival drinks firms and doubled my money. I sold up shortly after successor Ivan Menezes announced that he was shifting focus to its premium brands through his Drink Better strategy, which I saw as an admission that the rampant growth years were over.
History has proved me right, because the stock has done nothing in the last three years, despite its strong brands, emerging markets prospects, and cost-cutting strategy. But emerging markets haven’t delivered and hey, everybody is cutting costs these days. Last week’s update showed pre-tax profit easing upwards from £1.64bn to £1.78bn in the six months to 31 December, as revenue slipped from £8.72bn to £8.27bn. These are hardly numbers to get those tastebuds watering, especially since it’s valued at a pricey 21 times earnings and yields a so-so 2.95%.
British American Tobacco
Some might call British American Tobacco (LSE: BATS) the ultimate safe haven and its performance over the past five years appears to back that up, with its graph lining steadily upwards. It has grown 65% in that time, against zero growth on the benchmark FTSE 100. All isn’t plain sailing however, given that 70% of its earnings now come from emerging markets, and it’s reasonable to assume that Western health trends will migrate over there as populations get wealthier and healthier.
Yet its premium brands continue to gain market share and (like everybody else) BATS has boosted its figures by cutting costs successfully. The growing global trend to force cigarette manufacturers to adopt plain packaging could erode its brand advantage, however. Revenues and profits have stayed disappointingly flat over the last six years, although earnings per share are forecast to grow 7% this year. British American Tobacco is still a safe haven compared to most of the index, and one that satisfies with a slow burning 3.8% yield. At 18.7 times earnings, there’s a premium to pay for safety.
GlaxoSmithKline
GlaxoSmithKline (LSE: GSK) has undermined its status as a safe haven stock ever since the bribery scandal in China, although growth of 23% over the past five years looks pretty solid against the flat FTSE 100. The dividend yield still thrills at 5.6% but has been called into question lately, something that never happened in the old days. Trading at 15.6 times earnings, its valuation looks bang on the nail.
The attraction of Glaxo is its healthy product pipeline. The worry is that it doesn’t come through. Emerging markets offer great growth potential although again, they’re hardly to be relied on right now. Glaxo still generates plenty of cash and is rewarding investors with dividend hikes and buybacks, which is highly comforting as storm clouds gather over the wider market.