Should You Buy SABMiller plc, Diageo plc or Unilever plc For Emerging Markets Growth?

Which firm is priced to deliver the most upside from emerging markets growth — SABMiller plc (LON:SAB), Diageo plc (LON:DGE) or Unilever plc (LON:ULVR)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

SAB MillerIf, like me, you’re looking to tap into the emerging market growth theme from the relative safety of the FTSE 100, then three of the best options are brewer SABMiller (LSE: SAB), spirits giant Diageo (LSE: DGE) (NYSE: DEO.US), and consumer goods giant Unilever (LSE: ULVR) (NYSE: UL.US).

All of them are great companies, but none are cheap, and each has its differences — so I’ve been digging deeper to find out which is the best buy in today’s market.

Emerging vs developed

The first thing to notice is that these aren’t pure plays on emerging markets — each of these companies earns a substantial portion of its revenues in developed markets, as these figures show:

Company Emerging market sales
as % of total
SABMiller 65%
Diageo 48%
Unilever 56%

Source: Company reports

Although these figures aren’t exact, it’s clear that SABMiller is the purest play on emerging markets, even though 35% of the firm’s revenues come from Europe and North America.

Is the price right?

All three of these companies have maintained premium valuations for a number of years, thanks to the market-beating growth they’ve delivered over the last five years:

Company 5yr average
sales growth
5yr average
operating profit growth
5yr average
dividend growth
SABMiller 4.4% 10.1% 9.1%
Diageo 4.2% 7.2% 5.6%
Unilever 4.6% 8.4% 6.2%

As you can see, each firm has delivered solid growth, especially in terms of profits, which have risen faster than sales. That’s because these companies have all focused on cutting costs, and have benefited from the pricing power provided by their portfolios of brands.

The question for investors today is whether these valuations are still justified, and which firm looks the best value:

Company 2014/15 forecast
earnings growth
2014/15 forecast
P/E
2014/15 forecast
dividend growth
2014/15
prospective yield
SABMiller 19% 20.9 12.7% 2.1%
Diageo 2.4% 18.4 7.5% 2.8%
Unilever 4.7% 20.0 6.6% 3.5%

Source: Consensus forecasts

The most obvious thing about all of these valuations is that the expected earnings growth already seems to be in the price! There doesn’t seem much upside potential, and only one firm — Unilever — offers a yield that’s in-line with the FTSE 100 average.

All three firms are heavily exposed to exchange rate risk, which affects their reported results and free cash flow (from which dividends are paid), and personally, I’m not sure that now is the best time to buy any of these three.

However, if I was buying today, I’d rule out Diageo, as its growth figures are weakest, and its debt levels are twice those of the other two firms.

Of the remainder, SABMiller would have to be my pick for outright growth, while I’d choose Unilever for income — the consumer goods firm’s 3.5% yield should provide some downside protection for its share price, too.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares in Unilever. The Motley Fool owns shares of Unilever.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »