We recently compiled a list of the U.K. Dividend Aristocrats List: 2024 Rankings by Yield. In this article, we are going to take a look at where Diageo plc (NYSE:DEO) stands against the other U.K. dividend aristocrats.
In recent years, investors have turned away from UK equities, opting instead for global stocks, particularly high-growth options like US technology companies. The UK stock market is contracting at its fastest rate in over a decade, driven by takeovers of London-listed companies. According to Bloomberg data, approximately 45 companies have been delisted from the London market this year due to mergers and acquisitions, representing a 10% increase compared to the total for last year. This marks the highest number of delistings since 2010. Meanwhile, the value of deals targeting UK companies has surged by 81% this year, exceeding $160 billion.
Earlier this year, UK equities seemed to be experiencing a shift in sentiment among both large institutions and smaller investors. The British stock market continues to attract bargain hunters, as UK equities are now trading at a record discount of over 40% compared to global counterparts, based on Bloomberg data. Many of the takeover targets have been mid-cap companies listed on London’s AIM market, which typically feature low trading volumes and limited analyst attention.
That said, in November, investors returned to UK equity funds after three and a half years of consistent monthly withdrawals and a significant sell-off ahead of the Budget. Data from Calastone shows that retail investors directed a net £317 million into funds focused on UK stocks during the month. This inflow marks a notable shift, ending 41 consecutive months of net outflows, during which over £25 billion was withdrawn since May 2021.
Also read: 10 Undervalued Dividend Aristocrats To Buy According to Hedge Funds
The change in investor sentiment follows a challenging October for equity funds, which experienced record outflows as UK investors withdrew their money due to fears that the chancellor would raise capital gains tax (CGT). At the end of October, during the Budget announcement, Chancellor Rachel Reeves confirmed an immediate CGT increase. The lower rate rose from 10% to 18%, while the higher rate climbed from 20% to 24%.
Analysts suggest the UK stock market could be nearing a recovery, but the timing and pace of this turnaround remain uncertain. This is where dividend stocks play a key role. Prioritizing stocks with rising dividends can offer stability and consistency through different market cycles. In addition, they provide an opportunity for long-term growth, compounding returns over time until share prices rebound. The UK market offers one of the highest dividend yields among major markets. The FTSE 100 boasts a yield of 3.68%, while the FTSE 250, representing medium-sized UK companies, offers slightly lower yields but still provides attractive income opportunities. This allows investors to focus on higher-growth areas, such as smaller companies, while benefiting from increasing dividends. According to a report by BlackRock, currently, UK market dividends are growing at a rate of 2-3%, roughly in line with long-term inflation. Stocks with growing dividends typically have reliable cash flows, enabling them to increase payouts over time.
Janus Henderson’s 2023 annual dividend report confirmed the rise in dividend growth, noting that the UK distributed approximately $86 billion in dividends in 2023, a notable increase from the $63.1 billion paid out in 2020. Given this, we will take a look at some of the best FTSE dividend stocks according to yield.
Our Methodology:
For this list, we scanned over 40 holdings of the UK Dividend Aristocrats ETF, which tracks the performance of the highest-yielding UK companies with at least 7 consecutive years of dividend growth. From this list, we chose 10 stocks with the highest dividend yields as of December 28 and arranged them in order from lowest to highest yield. We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 900 as of Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of bottles of whisky and other alcoholic beverages from a winery.
Diageo plc (NYSE:DEO)
Dividend Yield as of December 28: 3.15%
Diageo plc (NYSE:DEO) is a British multinational alcoholic beverage company that specializes in Scotch whiskey and other spirits. The stock has fallen by over 11.5% in the past 12 months, as the company has been facing a tough macroeconomic environment. However, analysts are positive about its growth because the company holds leading products in several categories, such as scotch, gin, and vodka. Diageo’s large scale enables it to invest heavily in marketing, keeping its brands top of mind for consumers and making it hard for competitors to challenge its market position. Moreover, the company’s size provides a significant advantage, allowing it to acquire smaller rivals and enhance their value before they pose a serious threat.
Diageo plc (NYSE:DEO)’s FY24 earnings were also encouraging for investors. The company reported revenue of $20.3 billion, which fell modestly by 1.4% from the same period last year. The report also mentioned that the company either grew or maintained its total market share in more than 75% of its total net sales across measured markets, including in the US.
Aristotle Capital Management, LLC made the following comment about DEO in its Q3 2024 investor letter:
“Headquartered in London, England, Diageo plc (NYSE:DEO) is a global leader in the alcoholic beverages industry. The company has a vast portfolio of over 200 well-recognized premium spirits (~80% of FY 2024 sales), beers (~15% and mostly Guinness) and other beverages (~5%) that are sold in nearly 180 countries. Led by its Johnnie Walker brand, Diageo is the world’s largest exporter of Scotch whiskey—its largest category at ~25% of sales—followed by other spirits such as tequila and vodka (~10% each). Diageo also owns a ~34% stake in the premium champagne and cognac maker Moët Hennessy (a subsidiary of LVMH Moët Hennessy Louis Vuitton).
The company is the product of the 1997 merger between Grand Metropolitan and Guinness and the subsequent divestiture of its food-related businesses. M&A continues to be a part of Diageo’s strategy, as regional brands often dominate local markets (which provides further opportunities for mergers and industry consolidation). Over the last decade, Diageo has also meaningfully increased its presence in the rapidly growing tequila market with the acquisitions of Don Julio and Casamigos…” (Click here to read the full text).
Diageo plc (NYSE:DEO) has also been gaining traction because of its strong cash generation. In FY24, the company generated an operating cash flow of $4.1 billion and its free cash flow amounted to $2.6 billion, increasing by $0.5 billion and $0.4 billion on a YoY basis, respectively. With this cash position in hand, the company was able to return $1 billion to shareholders during its fiscal year. It raised its annual dividend by 5% to $1.0348 per share. With a dividend yield of 3.15% as of December 28, DEO is one of the best FTSE dividend stocks on our list.
Insider Monkey’s database of Q3 2024 showed that 26 hedge funds held stakes in Diageo plc (NYSE:DEO), compared with 31 in the previous quarter. The total value of these stakes is nearly $703 million. Among these hedge funds, Orbis Investment Management owned the largest stake in the company.
Overall DEO ranks 6th on our list of the U.K. dividend aristocrats. While we acknowledge the potential of DEO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DEO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.