Is Diageo a Buy?


LONDON -- I believe that Diageo should remain a top target for investors seeking safety against current macroeconomic uncertainty through quality, defensive stocks. I also reckon the company's track record of earnings growth is set to continue through forays into exciting new geographies.

Get ready to bottle gains
Alcohol producers are a classic safety play against a difficult economic backcloth, and Diageo is no exception. Analysts expect earnings per share to rise 9% during the financial year ended June 2013 to 102.6 pence, slowing from growth of 13% in 2012 but still representing a healthy return. EPS growth is expected to return to double digits in 2014, up 11% to 113.7 pence.

In my view, the firm's earnings dependability justifies a high P/E ratio of 18.1 for June 2013, and is cheaper than a number of its peers -- SABMiller's P/E ratio for 2013 stands at 20.7, for example.

Meanwhile, Diageo's decent, progressive dividend policy helps to offset the lofty multiple, offering investors a yield of 2.6% for 2013 and which is predicted to rise to 2.8% in 2014.

Emerging markets to drive growth
Diageo continues to make huge inroads into new regions across the globe, mitigating the prospect of lingering weakness in its established Western markets. On an organic basis, the company saw operating profit from Latin America and the Caribbean rise 19% during 2012, with Africa rising 16% and Asia-Pacific increasing 10% on an annual basis. In comparison, profit from North America and Europe rose just 7% and 1%, respectively.

The company has remained committed to investing to improve its footprint in these new markets in recent years. It acquired Ethiopia's Meta Abo in January 2012, the country's second-largest beer company, taking total spend in the African continent over the past five years to 1 billion pounds. Diageo also increased its stake in giant Vietnamese spirits producer Halico to more than 45% in June last year.

Excellent brand strength
The firm's catalog of premium brands -- comprising the likes of Guinness, Smirnoff, Johnnie Walker, and Baileys -- gives it supreme pricing power, giving license to increase prices to boost earnings and maintain margin improvement.

The Scottish National Party earlier this month floated the idea of placing a 1 pound tax on the production of every bottle of Scotch produced, a move that could potentially have a huge effect on Diageo's bottom line -- more than a quarter of the firm's sales emanate from its Scotch products. However, Diageo's products lie at the higher end of the market, and thus it should be able to pass these costs effectively on to its customers.

Cigarettes and alcohol
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Royston Wild does not own shares in Diageo. The Motley Fool recommends Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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