Why I Hate Diageo plc

Claive Vidiz whisky collection

There is a thin line between love and hate. But today I’m in a critical mood, so here are five reasons why I hate Diageo (LSE: DGE) (NYSE: DEO.US).

It has lost its fizz

I should start by raising a glass to Diageo, which is up more than 70% since I bought it just over two years ago. But it has lost its edge lately. Over the last 12 months the share price is up just 6%, against a 15% rise for the FTSE 100. One reason is that sales growth has slowed lately. While a 3.1% rise in sales in the three months to September may look reasonable, it is still down from 5% last year. Troubles in Europe are largely to blame, while sales in some developing markets, notably Russia and China, also took an unexpected hit.

It’s gone too far, too fast

Diageo isn’t a disaster zone, quite the reverse. That could be the problem. After soaring 124% over the past five years, it is looking pricey, trading at 18.9 times earnings against the FTSE 100 average of 15 times earnings. Especially since it seems to have lost its sales momentum.

It is pulling its punches

Diageo has posted double-digit earnings per share (EPS) growth in the early to mid-teens for the past three years, but that is forecast to dip to 5% next year. This adds to the sense of a company pulling in its horns, after a bullish spell of acquisition growth, during which it spent £3 billion in three years. New chief executive Ivan Menezes is going for quality, not quantity. He is looking to get global consumers to “drink better” instead, by focusing on the group’s premium core brands such as Johnny Walker Black label, Baileys and Smirnoff. While I respect his strategy, I also miss predecessor Paul Walsh’s adventurous streak.

It has a watery yield

If its growth rate is slowing, does Diageo cut it as an income stock? That’s a rhetorical question, because I know the answer. No it doesn’t, with a yield of just 2.4%. Covered 2.2 times, there is plenty of scope for progression, but the yield hasn’t improved much since I bought it. It is forecast 2.5% for June 2014. Ho-hum.

Drinks ain’t what they used to be

Maybe, just maybe, spirits isn’t the place to be these days. I’ve seen a change in drinking habits among my peers over the years. There’s a lot more wine drinking, a little less beer drinking, and much less spirit drinking. Spirits are still the thing in developing markets, where Diageo now generates 41% of its sales, but could that change over time? Tighter drinks regulation could also hit the business. These are worries for the long term, but combine that with a pricey valuation and lowly yield, and you could end up with a nasty hangover.

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> Harvey owns shares in Diageo.