2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8.8% this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Diageo (LSE: DGE) (NYSE: DEO.US) still offer good value, after five years of market gains.
Back to basics
Diageo’s share price has doubled over the last five years, but the shares have backed off in recent months and are up by just 4.8% so far in 2013, suggesting that growth may be slowing.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
As potential buyers of Diageo, we need to focus on what we can get for our money today — does this highly-rated stock offer good value?
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 19.9 |
| Trailing dividend yield | 2.5% |
| Operating margin | 30% |
| Net gearing | 118% |
| Price to book ratio | 6.9 |
Diageo’s performance over the last five years has left it looking quite expensive, in my view, especially considering its relatively high level of debt, which has been used to fund growth through acquisitions.
However, Diageo has looked expensive for a long time, but it’s kept growing regardless! The firm’s 30% operating margin is impressive, and Diageo’s dividend has risen by an average of 6.7% per year over the last six years — around double the rate of inflation.
Overall, Diageo may not offer traditional value, but it remains attractive.
Can Diageo keep up the pace?
The key question for new buyers of Diageo is whether it will continue to grow, or whether a period of consolidation is likely. Next year’s consensus forecasts suggest that growth could increase after a relatively flat year this year:
| Metric | Value |
|---|---|
| 2014 forecast P/E | 17.4 |
| 2014 forecast yield | 2.7% |
| 2014 forecast earnings growth | 14.2% |
| P/E to earnings growth (PEG) ratio | 1.7 |
Diageo has been on my watch list for some time, but I’m still struggling to convince myself to buy these shares at such a high valuation.
However, this could end up being my mistake — Diageo’s premium spirit brands have a global reach and are enjoying rising sales in many markets, some of which have considerable growth potential. The firm’s recent trading update showed quarterly sales growth of 10.9% in Latin American and the Caribbean, for example.
