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What Are Diageo plc’s Dividend Prospects Like Beyond 2014?

Today I am looking at drinks giant Diageo’s (LSE: DGE) (NYSE: DEO.US) dividend outlook past 2014.

Progressive but under-par dividends set to reign

Diageo has successfully traversed the challenge of macroeconomic pressure on drinkers’ wallets, having recorded sturdy growth over each of the past five years. The company can thank its premier portfolio of spirits and beers — comprising the likes of Guinness, Baileys and Smirnoff — and the supreme pricing and brand power therein for helping to keep earnings ticking higher.

And City forecasters expect the firm to punch further earnings expansion to the tune of 3% and 10% in the years concluding June 2014 and 2015 respectively.

This resilient earnings performance has enabled the company to grow the annual dividend every year during this period, and Diageo boasts an impressive compound annual growth rate of 7.1% dating back to 2009. And analysts expect the firm to boost last year’s payout 7.6% to 51p per share in 2014, before revving up 9.1% to 55.8p the following year.

Dividends for these years are also well protected by future earnings, the firm boasting coverage of 2.1 times through to 2015, just peeking above the widely-regarded safety threshold of 2 times prospective earnings.

Still, these projected dividends — if realised — only produce yields of 2.6% and 2.8% respectively, far below the FTSE 100 forward average of 3.1%. And increasing payments to shareholder is likely to continue to play second fiddle to the company’s expansion plans.

Like all beverage firms, Diageo has made no secret of its desire to expand its presence in the fast-growing and margin-busting premium drinks market. The company admitted that its quest to advance in this area “could give rise to further business combinations, acquisitions, disposals, joint ventures and/or partnerships” in addition to organic growth.

Indeed, Diageo has been no stranger to frantic M&A action in recent times, the firm sucking up the likes of Brazil’s Ypióca and China’s Shuijingfang over the past year and ratcheting its stake in India’s United Spirits. Capital expenditure of £604m in 2013 represented a massive leap from £445m during 2012, and I expect investment to continue heading northwards as Diageo aims to boost its global presence and add to its weighty stable of market-leading brands.

So although I expect the company’s dividends to remain both progressive and well protected, I believe that a priority for earnings growth mean that more lucrative income stocks can be found elsewhere.

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> Royston does not own shares in Diageo.