Why Diageo Shares Have Been Climbing


LONDON -- It looks like a busy week for Diageo , as it is set to release its interim results on Thursday. The shares have put on almost 60 pence from when I earmarked them as a potential buying opportunity less than two weeks ago. Here, I look at what may have caused the recent climb.

Interim results
Diageo has always said it has been confident of delivering its medium-term goals, and this week's statement is likely to confirm that the group is performing in line with market expectations. Analyst forecasts for 2012-2013 suggest organic top-line growth of 6.5%, which would surpass the company's previous 6% target.

My Foolish colleague G.A. Chester also suggests investors might see a first-half dividend of around 18.3 pence per share announced, though he warns that analyst EPS forecasts of around 103 pence give an increase of 9.3%, "representing a slight miss on the company's goal of double-digit growth."

Diageo's shares have soared 32% over the past year, while the FTSE 100 has risen just 7%. Over 10 years, Diageo's shares have risen an impressive 195%.

South Africa
On Monday, Diageo also confirmed that it had entered into a 23 million pound joint-venture agreement to acquire a 50% interest in the company that owns United National Breweries' traditional sorghum beer business in South Africa, pending consent from the South African competition authority.

The remaining 50% will be held by a company affiliated to Dr. Vijay Mallya, after announcing a "memorandum of understanding" that Diageo and Dr. Mallya would form the 50:50 joint-venture back in November.

This move presents the world's leading premium drinks business as not only a defensive share that ought to fare well during these turbulent economic times, but also as a possible play on emerging markets.

Indeed, consumer-goods company Unilever is benefiting from developing countries as well, recently reporting that 55% of its turnover now comes from emerging markets. Both businesses look set to continue their fast growth overseas, which can only be beneficial for shareholders.

It hasn't been a completely rosy start to the week for the drinks major, though, as negotiations with the authorities in India about the 1.3 billion pound deal for a majority stake in Indian drinks giant United Spirits hit a snag over the weekend.

The authorities questioned whether a put clause in the agreement was compliant with Indian law and, as such, the deal may now be delayed until the second quarter of the year.

This development is worth watching, as some analysts believe that the deal is priced into Diageo's shares already, and any serious hiccup could harm their value should the worst arise.

G.A. Chester has recently praised Diageo's CEO, Paul Walsh, one of the longest-serving FTSE 100 chief executives, stating that "continuity of leadership is a great foundation for long-term business success" and one of the three things he loves about Diageo.

However, rumours abound in the City that Walsh may retire in 2014, which might have a detrimental effect on the share price if that is actually the case. Currently, it is only conjecture, though, and this Thursday's statement is extremely unlikely to contain any such news.

As a shareholder, I await the results eagerly and remain confident about my investment.

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The article Why Diageo Shares Have Been Climbing originally appeared on Fool.com.

Sam Robson owns shares in Diageo. The Motley Fool recommends Diageo plc (ADR) and Unilever. 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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