Friday, August 22, 2008

Diageo (DEO) Dividend analysis

Diageo plc engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine worldwide.

Diageo is an international dividend achiever. It has been increasing its dividends for the past 10 consecutive years. From the end of 1997 up until August 2008 this dividend growth stock has delivered an annual average total return of 10.90 % to its shareholders. Diageo is the first international dividend company that I have analyzed in my pursuit of international exposure for my stock portfolio.



At the same time company has managed to deliver a 7.20% average annual increase in its EPS since 1998.

The ROE has increased from 29% in 1998 to 36% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 8.10% each year, which is higher than the growth in EPS. An 8% growth in dividends translates into the dividend payment doubling almost every 9 years. DEO has indeed managed to double its annual dividend payment of $1.395 in 1999 last year (2007).

If we invested $100,000 in DEO on December 31, 1997 we would have bought 2892 shares. In April 1998 your semi-annual dividend income would have been $2406. If you kept reinvesting the dividends though instead of spending them, your semi-annual dividend income would have risen to $6582 in September 2007 and $4272 by June 2008. For a period of 10 years, your annual dividend income would have increased by 67%. If you reinvested it though, your annual dividend income would have increased by 129.60%.


The dividend payout has remained above 50% for the majority of our study period with the exception of 2006. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.




I think that DEO is attractively valued with its low price/earnings multiple of 16 and above average yield at 3.60%. Even though the dividend payout is higher than the 50% I like the fact that it is has been steadily decreasing over the past decade.



I will keep looking for growing internationally based corporations which have increased their dividends and earnings consistently for at least five to ten years.

Disclosure: I do not own shares of DEO

Relevant Articles:

- Dividend Aristocrats List for 2009
- Dividend Aristocrats
- Best Dividends Stocks for the Long Run
- Best High Yield Dividend Stocks for 2009
- Best CD Rates

This article was written by Dividend Growth Investor. You may email questions or comments to me at dividendgrowthinvestor at gmail dot com.

10 comments:

  1. "The ROE has decreased from 29% in 1998 to 36% in 2007." I think you mean 'increased'. Also there is no yield listed when you mention it above the last chart.

    I really like their industry and brands but I have a feeling the stock is expensive. Also the yield is pretty low (2.8%) to have such a high pay out ratio in my mind.

    ReplyDelete
  2. MG,

    Thanks for pointing those ommissions out.

    I tend to like slow and steady stocks that pay a higher yield than S&P 500. The payout is not too rich at 60%. Foreign dividend stocks do provide currency exposure which could lead to a decrease in your dollar income even if your foreign company keeps increasing their dividends in local currency.

    ReplyDelete
  3. The yield is not 2.8%, it is about 3.6%.

    UK ADRs pay dividends twice a year at different rates: there is an interim dividend, and a final dividend. Globeinvestor and TDW get this wrong because they look at one payment and simply double it, but the correct yield is given by S&P.

    3.6% @ $74 US, and likely a raise at the end of August when they report.

    ReplyDelete
  4. I've also had my eye on DEO. Thanks for the write up

    ReplyDelete
  5. my mistake, I was reading it off of Google Finance...3.6 is much better than 2.8%

    ReplyDelete
  6. 3.6 is much better than 2.8, and DEO recently traded under $70, giving it a 4% yield. That was a deal. Jonnyrotten

    ReplyDelete
  7. I've been following DEO, my buy price is 68. Have you considered UN/UL for international exposure and a healthy dividend?

    ReplyDelete
  8. Thanks everyone for the feedback. I changed the current yield to over 3.60%.
    I am researching the dividend achievers right now but I will be happy to write an analysis of Unilever.

    ReplyDelete
  9. Hi,
    I'm a European dividend investor based in Amsterdam and I would like to suggest some other international dividend growth stocks to you that you could run an analysis on. Some may be more obvious than others. May personal favourites are:
    Sanofi-Aventis (Pharma, France)
    Novartis (Pharma, Switzerland)
    Nestle (Food, Switzerland)
    Unilver (Food, Netherlands / GB)
    Total (Energy, France)
    BP (Energy, GB)
    Michelin (Tires, France)
    Hermes International (Luxery goods, France)
    Richemont (Luxery goods, France)

    I'm looking forward to seeing more of your posts!

    Good investing,
    Jeroen

    ReplyDelete
  10. Jeroen,

    BP sounds like an interesting energy play to me. I will analyze it next Friday.

    Until then you can read my colleague's analysis from March at this site:
    http://www.dividends4life.com/2008/03/stock-analysis-bp-plc-bp.html

    ReplyDelete