Friday, February 5, 2010

Diageo Stock Analysis

Diageo plc (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine. The company offers a range of premium brands comprising Smirnoff vodka, Johnnie Walker scotch whiskies, Captain Morgan rum, Baileys Original Irish Cream liqueur, J&B scotch whisky, Tanqueray gin, and Guinness stout. Diageo is an international dividend achiever, which has raised distributions for over a decade.

The company has delivered annualized total returns of 12.4% on average.

Earnings per share have increased by 10% on average since 2000. EPS growth has been aided by a decade of share buybacks, which shrank the number of outstanding stock by a quarter. Emerging markets account for one third of company’s revenues. This is where many brand name consumer companies are currently experiencing growth. In 2009 Diageo earned $4.14/share. Analysts expect the company to earn $4.62 and $5.04 per share in 2010 and 2011 respectively.

The annual dividend payment has been increased by 6.80% on average, which is lower than the growth in EPS.

Return on equity has increased from 22.30% at the beginning of the study period to a very impressive 42% in 2009.

The dividend payout ratio has been volatile, and largely remaining above 50% during our study period. Currently this indicator sits at 55%.

Diageo currently trades at a P/E of 16, yields 4.20% but has a dividend payout ratio of 55%, which is a little bit higher for my taste. Other than that I like the company, the strong brand names it owns and its ability to raise dividends through thick and thin. I never really pulled the trigger on Diageo (DEO) since I analyzed it in 2008. I would try to initiate a position in the company on dips as soon as I have funds available.

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  1. Great analysis.

    One comment: When analyzing the dividend payment, you should focus on the UK traded shares, not the ADR. Focusing on the UK shares removes the currency impact. The UK shares demonstrate steady dividend growth.

    Full Disclosure: I have a large position in DEO.


  2. TD,

    I appreciate your comments, but I sttill worry that this would create confusion, especially if I reprot all of the numbers in US dollars ( EPS, stock price etc)


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