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What’s Telling Me to Buy Diageo Plc Today

Today, I am looking at Diageo (LSE: DGE) (NYSE: DEO.US), and tallying up whether to take a swig of the international alcohol giant.

A popular pick for drinkers in developing markets

Diageo full-year results released in late July showed net sales increase 5% in the year ending June 2013, to £11.43bn. This drove operating profit 8% higher to £3.53bn.

Lucrative emerging markets now account for 42% of group net sales, the firm announced, and net sales and operating profit here surged 11% and 18% respectively in 2013.

The drinks giant’s traditional markets remain more subdued by comparison. North American sales increased 5% during the period, still a very healthy result, which pushed profit 9% higher. But in Western Europe net sales dropped 4%, which consequently saw profits dive 7%.

The company continues to ratchet up M&A activity in developing regions to supplement bubbly organic growth and offset these less appealing growth rates in the West. This includes the purchase of Brazilian liquor giant Ypióca in August. It has also increased its stake in China’s Shuijingfang and India’s United Spirits in recent months, to 47% and 25%.

Magic margins help drive earnings higher

Diageo has a tremendous record nurtured over many years in keeping earnings rolling, and earnings per share increased 11% in 2013. City analysts expect this to advance a further 8% in 2014.

The beverages company has remained committed to boosting margins, and last year saw operating margins rise 120 basis points. Diageo boasts tremendous pricing power through brands such as Guinness, Smirnoff and Johnnie Walker, allowing it to hike prices without harming volumes. A positive mix in North America and Latin America, combined with diligent cost control, have also kept margins ticking higher.

Diageo currently trades on a forward price-to-earnings readout of 18.9, just below a figure of 19.2 for the entire beverages sector. Even though local issues have created contrasting performances in a number of its key markets over the past year — a customs dispute in Korea has affected performance there, for example — Diageo has still managed to keep earnings moving higher during the period.

In my opinion the company’s enviable earnings reliability, combined with excellent growth prospects in new regions, makes Diageo a standout pick for those seeking dependable investment candidates.

Dig out other delectable stock selections

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> Royston does not own shares in Diageo.