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My Two Favourite Tipples: Diageo plc And SABMiller plc

Shareholders in SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US) had cause for unexpected cheer on Tuesday when a double-whammy of good news sent the shares 5% higher. A long-running case against the company in South Africa’s Competition Tribunal was finally thrown out, on the same day that analysts at Bernstein Research revived bid speculation in the company.

sab.millerThe broker talked up the possibility that SABMiller might be acquired by its bigger rival AB Inbev, a transaction dubbed ‘MegaBrew’ that would give the combined operation 50% of the global beer market with little geographic overlap. But it has been talked about for ten years, so don’t hold your breath.

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A better combination

Though it’s the world’s second-largest brewer with a 15% market share, SABMiller is less well-known to private investors than that other titan of the FTSE 100 beverages sector, spirits-focused Diageo (LSE: DGE) (NYSE: DEO.US). But in fact the two companies have much in common:

  • The defensive characteristics of alcohol consumption;
  • Strong, global brands;
  • Scale and brand creating strong market power over distributors and merchandisers;
  • A strategy of tempting customers upmarket into more premium products;
  • Growth by acquisition;
  • Big in emerging markets, and looking to penetrate further.

Diageo has a 27% share of the global premium spirits market, with thirteen global brands including such names as Jonny Walker, Smirnoff and Guinness accounting for two thirds of sales. Two fifths of sales come from faster-growing emerging markets, but they’re expected to make up a half of sales by the end of next year.

SABMiller gets around three quarters of its operating profits from emerging markets, with Latin America and South Africa big contributors.

Highly rated

Both companies have seen their shares come off over the past twelve months, Diageo by 9% and SABMiller by 13%. Even so, they remain highly rated, Diageo on a PE of 18 and SABMiller 23. Like the less intoxicating consumer goods companies, sluggish growth in mature markets and weakness in emerging market currencies have taken the edge off profit growth. At the same time, investors who chased up valuations of these dependable, bond-like stocks in search of better yields than government bonds have become more risk-seeking. But that makes it opportune for long-term investors to fill up on stock.

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Tony owns shares in Diageo and SABMiller but no other shares mentioned in this article.