Wednesday, October 8, 2008

Diageo, Happy Hour On The Cheap

The trouble with trying to find dividend growth stocks to invest in during the onset of a recession or 'recessionary economic conditions' as we are currently in, is that the stocks of companies that should stand up well to these type of conditions are not cheap.

It is really obvious why. Investors are afraid that the recession will be long and deep and nobody will be buying anything with discretionary money (if they have any). The fear is that in the short term these companies' earnings will suffer, and thus their stock prices are not done going down, not by a long shot. Due to this investors flock to stocks that are viewed as safe havens. These tend to be stocks of companies who's sales and earnings are so stable that they'll likely stand up, no matter what the economy brings. Consumer staples come to mind when one considers this characteristic. Stocks of companies that manufacture products like diapers, soap, toothpaste, basic food and drinks, and health care goods are great examples of companies with more stable earnings.

Many great dividend growing stocks such as Colgate Palmolive (CL), Procter & Gamble (PG), Pepsico (PEP), and Johnson & Johnson (JNJ) have held up very well over the carnage that has been the last couple of weeks. On the other hand there are some dividend growing stocks that fall into this category that are offering better valuations.

I initiated a position in Diageo PLC (DEO) earlier this week. Diageo is a global branded alcoholic beverage company, and a "SIN" stock if you will. A recession probably won't really affect sales of products like Smirnoff Vodka, Baileys, Jose Cuervo Tequila, and Guinness stout, but yet Diageo was offering some good value Monday when it traded down to around $58, sporting a refreshing 5.4% dividend yield. Diageo's Price to Earnings ratio was also around 14x, which not only represents a low level relative to prior P/E's, but has to be considered good value for a firm who maintains return on equity north of 30% and profit margins of 19%. Diageo should be a slow grower, but their high yield, global exposure, and high value brands that are recession resilient make them a gem in times like these.

This article was written by the moneygardener. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.


  1. This really is a case of you wanting to get DRUNK off of all those dividends!

  2. Might as well face it I'm addicted to Dividends... ;)

  3. I own DEO, and I find it hard to understand why it is being hammered when it just reported solid earnings, double-digit growth in emerging markets, and a dividend raise. Great long-term hold. Would love to acquire more at recent levels.

  4. JNJ and PG also got hammered, enough said.


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