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3-Point Checklist: Should You Buy Diageo plc, SABMiller plc Or A.G. Barr plc?

Sin stocks like Diageo (LSE: DGE) (NYSE: DEO.US) and SABMiller (LSE: SAB) have a long history of outperforming the market and delivering above-average shareholder returns.

In this article, I’m going to compare Diageo and SABMiller, along with Irn Bru maker A.G. Barr (LSE: BAG), to see which looks the better buy in today’s market.

1. Profit and dividend growth

How fast have earnings per share (eps) and dividend risen at each firm over the last five years?

 

Diageo

SABMiller

AG Barr

5-year average eps growth

7.7%

6.5%

5.9%

5-year average dividend growth

6.3%

9.1%

7.4%

There are some slight differences, but the picture is clear: earnings growth has been significantly above inflation, and shareholders have enjoyed a dividend income that’s risen in real terms.

2. How profitable?

All three of these companies trade at a premium valuation, and have done for many years. One of the main reasons for this is that they are very profitable, as these figures show:

2014/15

Diageo

SABMiller

AG Barr

Operating margin

22.8%

20.5%

16.1%

Return on capital employed

11.1%

10.9%

21.1%

The differences here are interesting: while Diageo and SABMiller both boast superior operating margins, Barr’s superior return on capital employed (ROCE) suggests it may ultimately be a better business for shareholders. ROCE measures the return on shareholder fund and debts generated by a business. A return in excess of 20% is impressive.

3. What’s next?

We’ve seen how these three drinks firms have performed over the last five years, but what about the future?

Currency headwinds and slowing emerging market growth have impacted on Diageo and SABMiller’s performance, while Barr’s UK focus has helped it maintain momentum as our economy has started to recover.

These trends look likely to continue over the next two years, based on the latest City forecasts:

 

Diageo

SABMiller

AG Barr

2015/16 forecast eps growth

-7.5%

+6.3%

+9.5%

2016/17 forecast eps growth

+9.1%

+4.4%

+7.4%

I remain bullish on Barr: although the firm warned this week that price deflation in the UK could put pressure on revenue growth, I don’t believe this will derail Barr’s attractive long-term story.

Today’s best buy

Barr has one other advantage over its two larger peers — it has net cash, whereas both SABMiller and Diageo are burdened with high levels of debt. These firms’ high profit margins have meant that this hasn’t been a problem historically, but it is an additional risk.

All three companies trade on a forecast P/E of about 20 and offer prospective yields of between 2% and 3% — these aren’t cheap stocks.

However, I believe that all three should continue to deliver solid returns for investors, thanks to their strong brands and the sticky nature of their products — people are loyal to their favoured drinks.

In today's market, I'd be tempted to pick Barr as my top buy, with Diageo second -- but ultimately it's your decision.

However, you may be interested to learn that Diageo, not Barr, was recently chosen by the Motley Fool's top analysts for their recent report, "5 Shares To Retire On".

I believe that the five stocks in this report could deliver inflation-beating growth over many years, but I'd urge you to take a look and decide for yourself.

"5 Shares ..." is free and without obligation.

To receive your copy immediately, simply click here now.

Roland Head owns shares in Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.