Does Diageo plc Represent Decent Value For Money?

In this article I am looking at whether Diageo (LSE: DGE) (NYSE: DEO.US) provides appetising bang for your buck.

Price to Earnings (P/E) Ratio

Fears over economic slowdown in emerging markets has driven Diageo’s share price steadily lower since the turn of 2014. Still, drinks giant Diageo still changes hands on elevated medium-term P/E multiples, with figures of 19.2 and 17.8 created for the years concluding June 2014 and 2015 respectively.

These figures are far ahead of a reading of 15, which is generally considered reasonable value for money, while a forward average of 16.8 for the wider FTSE 100 sector is also taken out. This year’s figure is also beaten by a corresponding multiple of 18.7 for the beverages sector, although the prospect of a solid recovery next year drives Diageo comfortably below this reading.

Price to Earnings to Growth (PEG) Ratio

Diageo is expected to punch a 5% earnings decline in the current year as decelerating sales in developing regions dents revenues. Still, the company is poised to punch a meaty 8% bounceback in the following 12-month period.Diageo

As a consequence of this year’s expected earnings drop Diageo fails to create a valid PEG rating, although next year’s anticipated recovery creates a reading of 2.2. Although not catastrophic, this figure falls short of the widely regarded value benchmark of 1 or below.

Market to Book Ratio

Diageo currently boasts a book value of some £8.04bn, generated after subtracting total liabilities from total assets. This creates book value per share of £3.20 which, in turn, generates a market to book ratio of 5.9.

Any readout around 1 is considered exceptional value, so on this metric Diageo falls well short of being considered a bargain.

Dividend Yield

The alcohol play is a dependable selection for those seeking reliable dividend growth, the firm having grown the full-year payout for many years now. And this trend is expected to continue, with dividends of 50.9p and 55.3p per share pencilled in for this year and next.

However, these figures can hardly be described as lucrative, the impact of Diageo’s significant capital drive adversely impacting payout levels. Indeed, such payouts create modest yields of 2.7% for 2014 and 2.9% for 2015, far below the 3.2% FTSE 100 average.

Drinks giant a value failure

At face value clearly Diageo lags the competition on both a growth and income basis. I strongly believe that the firm’s excellent portfolio of industry-leading brands —  including Guinness and Smirnoff — combined with rising exposure to red-hot emerging markets should deliver strong long-term earnings expansion, even if the company cannot be considered a bargain based on medium-term projections.

3 Companies We Think Could Profit Most From The Economic Recovery

But regardless of whether you fancy taking a sip of Diageo, and are looking to maximise your chances of making a mint from your shares portfolio, I would urge you to check out this EXCLUSIVE Fool report which highlights many of the pitfalls that can seriously whack your investment returns.

Our "3 Companies To Profit From The Economic Recovery" publication picks out a handful of stock market stars poised to make stunning gains over the next 12 months, and tells you how to avoid those most likely to tank. Click here to enjoy this BRAND NEW report -- it's totally free and comes with no further obligation.

Royston does not own shares in Diageo.