Friday, January 20, 2012

Diageo Stock Analysis

Diageo plc (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine products worldwide. This international dividend achiever has paid uninterrupted dividends on its common stock since 1988 and increased payments to common shareholders every year since 1998.

Diageo’s largest competitors include Brown-Forman (BF-B), Constellation Brands (STZ) and SAB Miller (SBMRY).


Over the past decade this dividend growth stock has delivered an annualized total return of 10.20% to its shareholders.


The company has managed to deliver a 5.50% annual increase in EPS since 2001. Analysts expect Diageo to earn $5.77 per share in 2012 and $6.44 per share in 2013. In comparison Diageo earned $4.84 /share in 2011.
The company has maintained a high return on equity of over 30% for the majority of the decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment in US Dollars has increased by 7.30% per year since 2001, which is higher than the growth in EPS. With international dividend achievers, it is important to look at the trend in distributions in their base currencies. Despite the fact that the annual dividend payment appears volatile in US dollars, the growth in distributions in UK pounds has shown a consistent upward trend in distributions.

An 7% growth in distributions translates into the dividend payment doubling almost every ten years.

The company pays dividends twice per year. The interim payment is typically almost 40% of the total annual amount and is paid in April. The Final payment is approximately 60% of the total dividend and is typically paid in October.

The dividend payout ratio has mostly remained above 50%. It is just a tad above 50% currently, which means that the distributions are sustainable. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Diageo is attractively valued at 17.90 times earnings, has a sustainable dividend payout and yields 3.10%.

Full Disclosure: Long BF-B and DEO

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1 comment:

  1. Doesn't the high debt bother you? Liked this stock as a possible addition until I saw that. Also the price seemed high compared to the free cash flow/shares outstanding?

    ReplyDelete

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