Diageo plc Vs SABMiller plc: Which Has Better Growth Prospects?

Diageo plc (LON:DGE) and SABMiller plc (LON:SAB) are similar growth stocks

| 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.

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.

diageoWhat 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.

sab.millerWhat 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.

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.

Tony owns shares in Diageo and SABMiller

 

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
US Stock

This growth stock that Warren Buffett owns just hit 52-week lows. Should I buy?

Jon Smith flags up a high-profile US stock that the great Warren Buffett bought back in 2020 but which has…

Read more »

White female supervisor working at an oil rig
Investing Articles

Could the UK general election be bad news for this FTSE 250 energy producer?

The country is due to vote in the general election on 4 July. Our writer looks at the possible implications…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should we buy cheap FTSE 100 shares now, before it’s too late?

The FTSE 100 is up 5% so far in 2024 and hit an all-time high in May. That means the…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Here’s why I think the Lloyds share price could hit a 5-year high in 2024

It's up 13.5% so far in 2024, and reaching new highs. But where might the Lloyds Bank share price go…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

If I’d put £15k into this FTSE 250 stock in 2008, I’d have over £1.26m today

This multi-billion-pound business has created plenty of millionaires over the last 16 years, but can it repeat this performance?

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

3 dividend shares I’ve bought for the next decade!

I think these UK dividend shares can amplify my long-term passive income, and could even be on track to becoming…

Read more »

Investing Articles

If I’d put £5,000 in Scottish Mortgage shares at the start of 2024, here’s what I’d have now

Scottish Mortgage shares have staged a recovery lately, powered by the public and private growth stocks held in the portfolio.

Read more »

Happy couple showing relief at news
Investing Articles

9.9% dividend yield! Is this FTSE 100 stock a brilliant bargain?

This leading British enterprise looks like a delicious deal for passive income, trading at a low multiple while offering a…

Read more »