Today I am looking at why I believe Diageo (LSE: DGE) (NYSE: DEO.US) is a bubbly stock choice for intelligent investors.
Western fortunes continue to improve
As one would expect, signs of falling consumption in key developing markets has rattled investor enthusiasm for drinks giant Diageo — in its interim results published at the end of January, the company reported that net sales in these geographies rose just 1.3% during the six months to the end of 2013. Although the Africa, Eastern Europe and Turkey region saw sales speed up, this was more than offset by slowing growth in Latin America and the Caribbean and a year-on-year sales drop in Asia Pacific.
Still, the company still saw group net sales advance to the tune of 1.8% during July-December, and revenue expansion in North America — the firm’s largest region and responsible for 42% of group profit — remained promisingly steady at a chunky 5%. Meanwhile, heavy brand investment and innovation is also helping to drive improved performance in its second-biggest territory of Western Europe, where sales dipped just 1% compared with closer to 2% a year before.
Brand power blasts sales higher
Indeed, the strength of Diageo’s portfolio of market-leading labels — combined with accelerating activity in the premium-brand segment — is helping to drive group sales higher. The business reported that sales of its ‘super’ and ‘ultra-premium’ drinks surged around 19% during July-September.
Diageo saw ‘reserve label’ sales advance more than a quarter in North America alone during the period, thanks in most part to its Cîroc, Bulleit, Ketel One and Johnnie Walker brands. Not only is the exceptional pricing power of these products helping to drive margins higher, but a steady stream of innovations across the brands is also maintaining their popularity with consumers.
A great-value beverage pick
Diageo’s share price has shot lower in recent weeks, the result of wider cross-market fears over slowing emerging markets exacerbated by the firm’s January’s interims. The company was recently trading at an 8% discount to pre-release levels which, in my opinion, provides great value compared with many of its industry rivals.
Diageo is expected to record a 2% earnings dip for the year concluding June 2014, before punching a 9% rebound in the following 12 months. These projections create corresponding P/E ratings of 18 and 16.5, comfortably surpassing a reading of 19.9 for the rest of the beverages sector.
On top of this, the company also offers tremendous bang-for-your-buck for dividend hunters. The firm is expected to lift the payout this year by 8%, to 51.1p per share, before initiating a 9% advance next year to 55.5p. These prospective payments create yields of 2.8% and 3.1% respectively, beating an average forward readout of 2.3% for the rest of the sector.
