Should You Buy SABMiller plc, Diageo plc or Unilever plc For Emerging Markets Growth?

SAB MillerIf, like me, you’re looking to tap into the emerging market growth theme from the relative safety of the FTSE 100, then three of the best options are brewer SABMiller (LSE: SAB), spirits giant Diageo (LSE: DGE) (NYSE: DEO.US), and consumer goods giant Unilever (LSE: ULVR) (NYSE: UL.US).

All of them are great companies, but none are cheap, and each has its differences — so I’ve been digging deeper to find out which is the best buy in today’s market.

Emerging vs developed

The first thing to notice is that these aren’t pure plays on emerging markets — each of these companies earns a substantial portion of its revenues in developed markets, as these figures show:

Company Emerging market sales
as % of total
SABMiller 65%
Diageo 48%
Unilever 56%

Source: Company reports

Although these figures aren’t exact, it’s clear that SABMiller is the purest play on emerging markets, even though 35% of the firm’s revenues come from Europe and North America.

Is the price right?

All three of these companies have maintained premium valuations for a number of years, thanks to the market-beating growth they’ve delivered over the last five years:

Company 5yr average
sales growth
5yr average
operating profit growth
5yr average
dividend growth
SABMiller 4.4% 10.1% 9.1%
Diageo 4.2% 7.2% 5.6%
Unilever 4.6% 8.4% 6.2%

As you can see, each firm has delivered solid growth, especially in terms of profits, which have risen faster than sales. That’s because these companies have all focused on cutting costs, and have benefited from the pricing power provided by their portfolios of brands.

The question for investors today is whether these valuations are still justified, and which firm looks the best value:

Company 2014/15 forecast
earnings growth
2014/15 forecast
2014/15 forecast
dividend growth
prospective yield
SABMiller 19% 20.9 12.7% 2.1%
Diageo 2.4% 18.4 7.5% 2.8%
Unilever 4.7% 20.0 6.6% 3.5%

Source: Consensus forecasts

The most obvious thing about all of these valuations is that the expected earnings growth already seems to be in the price! There doesn’t seem much upside potential, and only one firm — Unilever — offers a yield that’s in-line with the FTSE 100 average.

All three firms are heavily exposed to exchange rate risk, which affects their reported results and free cash flow (from which dividends are paid), and personally, I’m not sure that now is the best time to buy any of these three.

However, if I was buying today, I’d rule out Diageo, as its growth figures are weakest, and its debt levels are twice those of the other two firms.

Of the remainder, SABMiller would have to be my pick for outright growth, while I’d choose Unilever for income — the consumer goods firm’s 3.5% yield should provide some downside protection for its share price, too.

Am I being short-sighted?

It's possible that I'm being short-sighted here -- all three companies could beat growth expectations, and currency headwinds can change rapidly.

It's also true that the Motley Fool's market-beating analysts -- whose Share Advisor tips have gained an average of 26.3% in two years -- recently selected Diageo for their latest wealth report, "The Motley Fool's Three Stocks To Beat Property".

The report is focused on emerging market growth, and highlights two other interesting opportunities. This report is completely FREE and without obligation -- to receive your copy today, simply click here now.

Roland Head owns shares in Unilever. The Motley Fool owns shares of Unilever.