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3 New Year’s Resolutions For Diageo plc

This must be a bittersweet time to be the boss of brewing behemoth Diageo (LSE: DGE) (NYSE: DEO.US).

On the one hand, December saw your customers knocking back your products like there was no tomorrow, culminating in countless New Year’s Eve blowouts with their clinking champagne glasses — music to the ears of Diageo shareholders, with the company owning big stakes in Dom Pérignon and Moët & Chandon.

On the other hand, tomorrow eventually came, and many of the same tipsy partygoers woke up on 1 January with screaming hangovers and a pledge to cut back for a month, if not forever. Talk about a roller-coaster ride!

Diageo’s roots go back to the 18th Century, however, so it will know better than to believe the shaky resolutions of those who over-indulged at Christmas. For most of us, drinking (in moderation!) is a lifelong pursuit, and by establishing a strong loyalty to the numerous brands it owns, from Johnny Walker whiskey and Smirnoff vodka to Guinness, Bushmills and Baileys, Diageo has grown annual sales to well over £11 billion.

I’d drink to these

Of course, Diageo didn’t grow to dominate the drinks space by resting on its laurels — or nipping to the pub for a swift half and staying for two, for that matter — so it will be looking at 2014 as a year to reward the faith of investors whose appetite for the shares has more than doubled their price in five years.

After all, 2013 was hardly a vintage year for the company. While its share price rose 11%, that gain lagged the FTSE 100 by nearly 4%. And with a 2.7% dividend yield, Diageo shares no longer pay above the market average. The company can’t be responsible for investors bidding up the price of its shares, but you can bet it will be held responsible for not living up to their hopes.

So here are three priorities Diageo could focus on in 2014 to keep the bandwagon rolling. Think of them as New Year’s Resolutions!

1) Abstain from buying back more shares

Over the past 12 months, Diageo has bought back millions of shares, most recently buying 450,000 shares at a price of £19.84 each. However, with the shares trading on a forward P/E of 17.5, it’s hard to argue that these buybacks were bargains. At the moment stock market investors seem united in their enthusiasm for share repurchases, but I think it’s a phase that will pass – particular if the share price falls and makes previous buys look toppy.

2) Boost the dividend yield

If Diageo really has more money than it knows what to do with — a nice problem to have — then it should increase its dividend. True, the dividend is forecast to grow by over 14% to 51.5p per share in 2014, but that will still be more than twice covered by earnings. I think Diageo could afford to be a bit more generous to pacify any shareholders who don’t like my proposed suspension of share buybacks, and aim to pay out at least 55p per share.

3) Keep the faith with emerging markets

In its most recent update, Diageo revealed choppy results in the developing world. Some of these reflected local concerns — such as the clampdown on giving expensive gifts in China, including fancy whiskies — but currency turbulence also played a role. Diageo reiterated its medium term sales growth target of 6%, but some analysts have queried this as a result of these issues, and expect a weaker performance in 2014. One thing seems certain though, which is that in the long term Diageo must strive to achieve the brand appeal that it’s achieved in the West in all these newer markets.

Sticking to its plans in the emerging markets may spark criticism if the slowdown that’s also been reported by the likes of Unilever continues over the next 12 months. There may even be calls for cost-saving responses, but Diageo should resist them.

The company is a £50 billion giant today thanks to the ubiquity of its drinks from Paris to Portsmouth to Pittsburgh, but it could be a £100 billion company if conquers the world. And that’s not a bad target for a New Year’s resolution!

Diageo has long been a dividend paying stalwart of the UK market, but if its sub-3% dividend yield isn't attractive enough for you, you have lots of other dividend-paying shares to choose from.

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> Owain owns shares in Diageo.