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The Best Reason To Buy Diageo plc

DiageoShares in Diageo (LSE: DGE) (NYSE: DEO.US) have had a pretty good decade, with a rise of 155% against just 42% for the FTSE 100 — and that’s without even considering dividends.

Part of the gain has been due to Diageo’s relatively defensive nature and its wide international spread. Contrary to what some might expect, during the down times the booze keeps flowing — a sorrow drowned is a sorrow halved, and all that.

Diageo has some very strong brands too, like Gordon’s, Hennessey, Johnnie Walker, Smirnoff, Captain Morgan

Wordwide presence

And looking at global diversification, in 2013 Diageo took 30% of its turnover from North America (but 50% of its profits — it’s a high-margin market), with 20% coming from Western Europe. The Asia Pacific region accounted for 12%, with the rest coming from Africa, Eastern Europe, and other international markets.

But the past is the past, so what does the company look like as an investment right now? Well, we did see a 7% fall in earnings per share (EPS) in a pretty tough year last year, after an number of years of positive growth. But that was largely due to the strength of sterling, and a 4% recovery forecast for next year would take EPS up 38% in five years. There’s also a rise in the dividend of 45% predicted over the same period.

Fairly priced

Because of Diageo’s reputation as a quality company, the shares command a relatively high P/E compared to the FTSE 100 average — we saw 19.5 last year and forecasts suggest 18 for the current year, while the index is on a long-term average of 14.

The dividend yield is not one of the highest at around the FTSE average of 3%, but with a 9% hike for the year ended in June, it is growing faster than most and way ahead of inflation. Investors are prepared to pay more from that, as a growing dividend will get you more cash over the long term than a flat one at a higher current yield.

Interestingly, at full-year results time back in July, Diageo reported its strongest sales in its higher-margin product categories, with net sales of its Reserve Brands up 14%. That’s a very good direction for its product mix to be going.

Growth potential

Speaking of the company’s international reach, chief executive Ivan Menezes (after his first 12 months in charge) said “Diageo has leading brand and market positions and financial strength and our recent acquisitions have given us a strong emerging market footprint“. And as we’re also seeing in the tobacco business, when emerging market wealth increases, consumers move to more profitable brands.

All in all, I see Diageo as a very solid company that’s doing everything right, and its shares trade at a fair price.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.