Everybodys portfolio needs a little stimulation from time to time. A drink, maybe a smoke, if thats your thing. These two stocks could be just the kickeryou need.
Straight, no chaser
Spirits giant Diageo (LSE: DGE) is still suffering from a mightyhangover that wasacquisition-hungry former chief executive Paul Walshs legacy. He was wise enough to bailout before the party came to an abrupt halt, leaving successor Ivan Menezes to develop a more sober strategy. Unfortunately, Diageo no longer packs the punch it once did, as it battles against headwinds such as the Chinese crackdown on gift-giving, the wider emerging market slowdown, and slippage in North American sales.
Falling revenuesmean that Diageo still trades at a pricey 21 times earnings, despite its straightened circumstances. The dividend is better than it was, and investors will have raised their glasses to the recent 5% hike in the interim payoutto 22.6p ashare, but ithardly excites at 3%.
On the upside, three years of falling earnings per share (EPS) are likelyto reverse in the year to 30 June 2017, with forecast growth of 9%. This is primarilydue to Diageos cost-cutting plans: forecast revenues of 11bn are way down on the near-16bn investors were toastingin the year to June 2015. I may sound flat on the stock but Im not as it has a strong portfolio of global brands and improving growth prospects, sonow might be the perfect time to add a splash to your portfolio.
Slow burner
British American Tobacco (LSE: BATS) is due a bad run but theres little sign of that happening, with its upwards share price surge lastingfor a decade or more. Defensive in bad times, the stock also manages to put on a fine attacking display during the good times. Its up 54% over the last five years, and will have TRIPLEDyour money over the last decade, and thats without taking into account its dividend.
Topdividend investor Neil Woodford knows a great income/growth playwhen he sees one and hes a long-term fan, with good reason. Although the current yield is a relatively modest 3.66% the main reason is that the share pricehas been growing so rapidly that even a progressive board struggles to keep up. In February, it showed willing by increasing the dividend by 4%.
British American Tobaccos recent strong growth has come despite currency headwinds, which reduced organic revenue growth of 6.1% at constant exchange rates to just 1.7%. Althoughsmoking is a dying market and Im not convinced that vaping will come to its rescue, British-American Tobacco is offsetting that by expanding its market share and successfully promoting its premium brands. It isnt cheap at 20 times earnings but unlike Diageo, recent performance has justified itsvaluation.
Future prospects are promising with forecast earnings per share growth of 12% and 8% over the next couple of years. If you buy both these stocks, you combinethe heady prospect of a recovery play with the intoxicating aromas of a company thats already there.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
