To fund managers, these company names are synonymous with heritage, quality and success. Why does the market rate their shares so highly?
Although the corporate entity only came into being in 1996, some of Diageo‘s (LSE: DGE) (NYSE: DEO.US) brands date back to the mid-18th century. These include the J&B whisky range and Guinness. Captain Morgan, Bushmills and Smirnoff are more key brands in the Diageo portfolio.
The worldwide recognition that these products enjoy gives Diageo tremendous pricing power. This feeds back into profits and shareholder dividends.
In the last five years, Diageo has managed to increase operating profits at an average rate of 9.4% a year. Dividend increases have been slightly lower at 6.7% per annum.
For the year ending June 2014, Diageo is expected to report earnings per share (EPS) of 110p and announce total dividends of 51.4p. That puts the shares today on a 2014 P/E of 18.0, with a forecast yield of 2.6%.
Rival brewer SABMiller (LSE: SAB)(NASDAQOTH: SBMRY.US) has a similar scale and global footprint. Key drinks brands in the group are Grolsch, Peroni, Pilsner Urquell and the eponymous Miller. These are must-stock items for off-licences and supermarkets. This helps to protect SAB’s margins, as the company has a strong hand in negotiations.
SABMiller has delivered similar profit growth to Diageo. However, dividend increases have been higher, at an average rate of 11.7% a year for the last five years.
Analysts appear to have more confidence in SABMiller’s future and are predicting superior profit growth to its rival Diageo. Expectations are for a 33% EPS increase this year, followed by another 11% the following year. The shares trade at a small premium to Diageo: 20.8 times forecast profits, with a 2.1% dividend yield expected.
Reckitt Benckiser (LSE: RB) owns a collection of food, household products and pharmaceutical brands. Products range from French’s mustard to Calgon and from Harpic to Nurofen. To protect these brands, Reckitt Benckiser invests considerable amounts in advertising. This maintains brand recognition and deters competitors. Any rival would have to match Reckitt’s spend to secure a similar profile.
The result is huge economies of scale and enhanced profit margins.
After five years of increasing EPS by an average of 16.3% per annum, RB is expected to deliver much lower growth over the next two years. The shares are available to buy at 18.0 times 2013 forecast earnings, with an expected yield of 2.9%.
> David does not own shares in any of the companies mentioned.