Growth at great price
In my opinion both Lloyds and Diageo offer excellent value for money on a pure earnings basis, although it could be argued both offer very different risk profiles.
The effect of significant asset-shedding following the 2008/2009 financial crisis not to mention the cultural impact that a government bailout brings means that Lloyds can theoretically be considered one of the least volatile banking stocks currently on offer.
While the business has a narrow focus on the UK high street, peers like Santander and HSBC depend hugely upon emerging markets for future growth, while Barclays is also touted to be jump-starting its Investment Bank again. While earnings are not expected to explode at Lloyds by comparison a modest 4% rise is pencilled in for this year I believe a subsequent P/E rating of just 8.6 times makes the stock a highly-attractive banking selection for more cautious investors.
Diageo is also expected to produce only a small earnings improvement in the near-term, and a 1% bottom-line advance is chalked in for the 12 months to June 2016. But I believe the drinks manufacturer should see earnings explode in the coming years, helped by entering the hot premium segment and vast investment in marketing activities.
Indeed, the companys top-level labels like Johnnie Walker whisky and Guinness stout carry terrific pricing power which few others can match. In addition, Diageo carries tremendous clout in the high-growth North American market as well as developing regions of Latin America and Asia. So while a prospective P/E rating of 20.7 times may be considered expensive on paper, I believe Diageos strong growth potential fully merits this premium.
Dividends set to explode
And thanks to their solid long-term earnings prospects, the abacus bashers expects dividends at both Lloyds and Diageo to march higher in the years ahead.
Indeed, broker optimism concerning Lloyds dividends has been given fuel by the firms rapidly-improving capital strength. Assisted in no small part by its ongoing Simplification streamlining measures, Lloyds has seen its common tier equity 1 (CET1) ratio leap to 13.7% as of the close of September, up 90 basis points from the turn of 2014.
Having got its dividend policy back on track in the spring, Lloyds is expected to furnish shareholders with a 2.4p per share reward in 2014, yielding a very respectable 3.3%. And this figure leaps to 5.2% for 2016 amid expectations of a 3.8p dividend.
Meanwhile, Diageo is expected to keep its progressive dividend policy chugging along for some time yet an extra 4% hike is forecast for fiscal 2016, to 58.4p per share, yielding a handy 3.2%. And I fully expect payouts to ratchet up a notch in the coming years as earnings head higher.
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