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The London Stock Exchange isn’t short on legendary dividend stocks. With some of the oldest businesses in the world listed, the UK stock market has a plethora of dividend aristocrats for income investors to capitalise on. And two that are often at the top of people’s to-buy lists are Diageo (LSE:DGE) and Halma (LSE:HLMA).
Both businesses have more than 25 years of consecutive dividend hikes under their belt. And based on current consensus, both stocks appear to be in line to continue their impressive track records. So while their respective dividend yields of 3.3% and 0.9% aren’t that exciting today, they could become far more enticing in the long run.
But does that make these businesses no-brainer long-term buys to consider right now?
Is Diageo a good investment?
Starting with the global alcoholic beverages business, Diageo holds a portfolio of some of the most popular brands, including Johnnie Walker and Smirnoff. And since alcohol isn’t exactly falling out of fashion, I think it’s fair to say that long-term demand for its drinks isn’t likely to fall off.
That is, of course, a terrific trait to have as a dividend stock. After all, if customers are likely to keep on spending, that means more cash flows in the long run that can fund an ever-increasing dividend. However, despite its impressive track record, Diageo’s far from a guaranteed success. In fact, the firm has actually been dealing with a series of issues that have culminated in falling sales.
In particular, Latin America, as well as the Caribbean, has seen a significant drop in sales. Management places the blame on adverse economic conditions, which definitely has some logic behind it. But the group’s vague outlook on when performance might improve isn’t exactly reassuring.
Subsequently, the shares have slumped by 25% over the last 12 months. And until some clearer guidance can be provided, this isn’t a dividend stock I’m tempted to buy right now.
What about Halma?
Unlike Diageo, Halma shares have delivered a far more encouraging performance, rising by 34% over the same 12-month period. The safety products conglomerate seems to be successfully riding the tailwinds of increased regulatory safety requirements.
In particular, its Environmental division, which specialises in leak detection and water quality analysis, appears to be charging full steam ahead as UK water companies seek to start tackling ageing infrastructure – a problem that’s prominent in the US as well.
Looking at the group’s latest trading update, the company continues to be on track for another stellar year. Management’s reiterated its previous guidance of double-digit profit margins and outlined a promising bolt-on acquisition pipeline.
So is Halma a good investment right now? Not necessarily. There’s no denying this business screams high quality. But the problem is that other investors have already seemingly noticed the opportunity and baked its future growth potential into the share price.
At a forward price-to-earnings ratio of 27.6, this stock’s trading at a pretty lofty premium. Therefore, despite its legendary status, I’m not rushing to buy the shares at the current valuation.
