As a long-term buy-and-hold investment, alcoholic beverage giant Diageo (LSE: DGE) has many ideal attributes.
For starters, the company owns a world-class portfolio of premium brands such as Smirnoff, Johnnie Walker and Tanqueray. It has strong geographic diversification, selling its products in 180 countries.
Second, the stock is relatively recession-proof. During good times, consumers celebrate with alcohol. During tough times, they drown their sorrows with, you guessed it, alcohol.
Third, Diageo has an excellent track record of generating shareholder wealth. It pays consistent dividends, and increases the payout on a regular basis.
And fourth, the group has significant emerging markets exposure, providing a growth story going forward. As the wealth of consumers in countries such as China and India rises, Diageo should benefit.
These key attributes make the stock popular among both private investors and the institutional crowd alike. In today’s highly uncertain economic environment, Diageo, with its dependable earnings, is the stock that everyone wants to own. Indeed, over the last 12 months, investors have scrambled to get on board, pushing the share price up by over 20%. So is Diageo still worth buying now? Or has the ship sailed? Let’s take a look at the current metrics.
Last year, the group generated earnings per share before exceptional items of 108.5p. This year, earnings are expected to increase 7.3% to 116.4p. At the current share price of 2,660p, that places the stock on a forward looking P/E ratio of 22.9. Is that good value?
On the surface, that looks like quite a lofty valuation for a consumer staples stock. After all, this is not an exciting technology company capable of changing the world. The average forward P/E for the FTSE 100 is currently 15.1, suggesting that Diageo shares are on the expensive side.
How about the P/E-to-growth (PEG) ratio? This compares a company’s valuation to its growth, and is calculated by dividing the trailing P/E ratio by the expected growth rate. A ratio under one is considered desirable. In Diageo’s case, the PEG is 3.4. That also suggests the stock is overpriced.
Let’s look at the dividend yield then. How does Diageo’s compare to the average FTSE 100 yield?
Diageo is currently forecast to pay out 66.9p per share for FY2018. At the current share price, that’s a prospective yield of 2.5%. Again, that doesn’t appear to offer much value when you consider that the average FTSE 100 forward yield is 3.2%.
On the basis of its P/E ratio, its PEG ratio and its dividend yield, Diageo looks expensive right now. I’m not convinced there’s much value left in the stock at present.
I own Diageo shares and I’m bullish on the long-term story. At some stage in the future I would like to add to my holding. However for now, I believe patience is required. I’ll be waiting until the stock trades at a more attractive valuation before buying more shares.
Edward Sheldon owns shares in Diageo. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.