I think FTSE 100 drinks giant Diageo (LSE: DGE) is a wonderful company. Id like to own it as one of my core shareholdings. But I suspect Ill have to wait a while before Im able to buy the shares.
Let me explain.Investing legend Warren Buffett famously said that its better to buy a wonderful company at a fair price than a fair company at a wonderful price.
What he meant, basically, was that its worth paying extra for quality. This is an argument thats been used by Diageo fans for a long time. And I cant argue with the results.
An investor who bought the stock seven years ago has seen the value of their shares double. During the same seven-year period, theyve also received dividends worth about 24% of their original purchase price. Thats an impressive total return of about 124%.
Why wont I buy?
Given this track record, I might be wrong to refuse to buy the shares today. But one thing Ive noticed is that Diageo stock has got steadily more expensive over the last seven years.
In August 2012, the firm reported adjusted earnings of 94.2p per share. Based on the share price at the time, this valued the stock on about 18 times earnings.
Fast-forward to today, and the groups accounts for the 12 months to 31 December show adjusted earnings of 127.8p per share. These figures price the stock at nearly 23 times earnings.
This isnt an outrageous valuation. But it indicates that the shares only offer an earnings yield a measure of profits compared to valuation of about 5%. In my view, thats quite low. I generally consider a figure of about 8% to represent good value.
History suggests that there will be times when the Diageo share price dips. This might be due to a market crash, or to short-term problems. This is when I hope to buy. In the meantime, I continue to rate the shares as a hold.
Im tempted by this stock
One company whose valuation does seem attractive to me is FTSE 250 recruitment group Hays (LSE: HAS). Although its well known in the UK, this company also operates globally. Major markets include Australia and New Zealand, Germany, Canada, China and the USA.
With such a global footprint, its exposed to risks such as a US-China trade war. But Hays exposure to the risks of Brexit should be more easily contained. As it happens, the firms performance in the UK remains fairly solid. According to figures published on Thursday, net fees from the UK & Ireland rose by 3% during the second half of 2018. Operating profit from the region rose by 6%.
These figures were fairly weak compared with growth elsewhere. But I can live with that, given the current uncertainty facing UK businesses.
Good value at this level
Globally, Hays headcount of fee-earning recruitment consultants rose by 7% during the half-year period, with China, the USA and Canada each recording a 20% rise. Pre-tax profit rose by 6% to 122.6m and shareholders will receive an interim dividend of 1.11p, an increase of 5%.
Hays valuation looks tempting to me. The stock boasts an earnings yield of about 11% and offers a 4.5% dividend yield. Thats more in line with my idea of value. Id consider the shares as a buy.
Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled “The Foolish Guide To Financial Independence”, which is packed full of wealth-creating tips as well as ideas for your money.
The report is entirely free and available for download today, so if you’re interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?
