MENU

3 Numbers That Don’t Lie About Diageo plc

Diageo (LSE: DGE) (NYSE: DEO.US) shareholders have enjoyed an average annual total return of 11.3% over the last ten years — 40% more than the FTSE 100 average of 8.1%.

Last week’s news that Diageo-controlled United Spirits has agreed to sell its Whyte & Mackay whisky business, to satisfy Office of Fair Trading concerns about the firm’s pricing power, highlights how dominant Diageo’s spirit brands have become.

diageoDiageo shares have now fallen 14% from their 52-week high of 2,152p, and I believe that the current slowdown in the firm’s growth could continue for longer than expected. Here’s why.

1. -2%

Diageo has delivered average sales growth of 7.2% since 2008, while adjusted earnings per share have risen by an average of 10.4% per year.

However, Diageo’s growth has come to a full stop this year: sales volumes fell by 2% during the first nine months of the year, while revenues rose by just 0.3% during the same period (Diageo’s financial year ends on June 30).

Diageo bulls — including most City analysts — seem to believe this is a temporary glitch, caused by factors outside Diageo’s control, such as the Chinese corruption crackdown. Current consensus forecasts are for an 8% rise in earnings in 2014/15.

However, I reckon that many of the factors behind this year’s slowdown may persist next year, and I expect more modest growth.

2. 127%

Diageo’s 30% operating margin means that its business is strongly cash generative and should be able to afford above-average levels of debt.

That’s just as well: Diageo’s net debt has risen by an average of 5.7% per year since 2008, and has climbed by 12% so far this year, leaving the firm with gearing of 127%, which is higher than I like to see.

The explanation is simple — acquisitions have absorbed much of Diageo’s spare cash, most recently through its efforts to gain control of India’s United Spirits. This deal may yet cost another £1.1bn, if the firm’s current tender offer for 26% of United’s shares is successful.

3. 7.7%

Diageo’s dividend has grown by an average of 5% per year since 1998. The firm has ramped up dividend growth since 2011, and this year’s forecast is for a 7.7% increase to 51.1p, giving a prospective yield of 2.8%.

Any sign of slowing dividend growth would be a serious concern, in my view, as Diageo wouldn’t take such a decision lightly.

Is Diageo still a buy?

Diageo is too expensive for me to consider buying at the moment -- but I may be underestimating the firm's future growth potential.

Indeed, the Motley Fool's analysts recently chose Diageo for their latest exclusive wealth report, "The Fool's Five Shares To Retire On".

If you'd like an alternative view on Diageo, I'd strongly suggest you download this free report. The five stocks featured in the report currently offer an average prospective yield of 4.3% and offer serious dividend growth potential.

This report is completely free and without obligation. To get your copy, click here now.

Roland does not own shares in Diageo.