They are the two titans of the beverages sector. Diageo (LSE: DGE) (NYSE: DEO.US) claims a 27% global share of the premium spirits market. SABMiller (LSE: SAB) is the world’s second-largest brewer, with a 15% global market share.
There are striking similarities between the two companies, in the way they exploit strong consumer brands to give them market power over distributors and merchandisers, their expansion through acquisition, and their targeting of emerging market growth. Both are also expensive: Diageo is trading on a prospective P/E of 18.9, SABMiller a little pricier at 21.1.
Investors treat the sector as defensive, as alcohol sales are relatively insensitive to economic conditions. But unlike their fellow defensive sin stocks, the tobacco companies, yields in the beverages sector are parsimonious. Diageo pays 2.7%, SABMiller 2.1%, both well below the FTSE 100 average of 3.6%. Both companies keep over half their earnings back for reinvestment. Clearly, investors are buying future growth.
What the past tells us
Which company offers the best long-term prospects? If the past is any guide to the future then it’s a close-run thing, but Diageo has the edge on quality, whilst SABMiller wins on quantity.
Over the past five years Diageo has delivered an impressive 10.2% compound annual growth in earnings per share. That’s ahead of SABMiller’s 9.4%, but importantly Diageo’s earnings have grown consistently. The brewer’s track-record is more volatile. However SABMiller’s shareholders have been rewarded with an 80% rise in the share price over that period, double Diageo’s 40% rise.
What the future holds
Analysts are pencilling in similar increases of around 8-9% in both companies next full-year earnings. Emerging markets will power growth at both companies.
Diageo expects half of sales to come from emerging markets by the end of next year, and has just revamped its management structure to focus on India and China. It’s paying a steep price to gain control of its Indian whiskey associate, United Spirits, but there’s massive scope to implement the company’s ‘premiumisation’ strategy, tempting new consumers up the quality curve.
SABMiller already earns 80% of its profits in emerging markets. Its pre-eminent position in Africa is a platform for growth, as consumers progress from home brews and local beers to international brands. Latin America is also a key region, contributing a third of cash profits.
