Is It Still Safe to Buy Diageo?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market could be overheating.

So right now I'm analyzing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today's uncertain economy.

Today, I'm looking at drinks giant Diageo to determine whether the shares are still safe to buy at 1,905 pence.

So, how's business going?
Diageo has been going from strength to strength recently as a combination of organic growth and bolt-on acquisitions have enabled the company to improve earnings by nearly 40% in just three years.

However, there could be some speed bumps ahead for Diageo as the company faces new, strict government regulation in one of its key growth markets: Turkey.

In particular, the Turkish government recently voted into law a bill that prohibits the sale of alcoholic beverages at night and bans the advertisement of alcohol, which could put the brakes on Diageo's growing sales in the country.

Unfortunately, this legislation follows Diageo's acquisition of Mey Icky last year, Turkey's largest beverage company and Diageo's most expensive acquisition to date.

Furthermore, it appears that the company's problems are not just limited to Turkey as Diageo recently reported that during the first quarter of this year, the firm's total volume of alcoholic beverages sold across the group fell 1%.

Having said that, while volumes fell, Diageo's revenues still expanded 4% for the period, thanks to strategic acquisitions and price increases.

Expected growth
As I have mentioned, Diageo's earnings have grown rapidly during the last three years and many City analysts expect this trend to continue. City forecasts currently predict earnings of 1.03 pounds per share for this year (10% growth) and 1.14 pounds for 2014.

Shareholder returns
Diageo has a solid history of returning cash to shareholders. During the last 10 years alone, the company has increased its per-share dividend payout by a compounded 83%. Furthermore, City analysts believe this trend is set to continue with the payout predicted to grow 7% this year, to 47 pence per share.

In addition, Diageo's dividend yield is currently 2.4% -- larger than that of its peers in the beverages sector, which currently offer an average dividend yield of 2.2%.

Despite Diageo's defensive nature and its seemingly unstoppable growth, the company still trades at a discount to its competitors. Diageo currently trades at a historic P/E of 19, while its peers trade on an average historic P/E of around 25.

Based on Diageo's growing revenues, low valuation in relation to its peers and the company's defensive nature, overall I believe that Diageo still looks safe to buy at 1,905 pence.

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In the meantime, please stay tuned for my next FTSE 100 verdict.


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Rupert Hargreaves does not own any shares mentioned in this article. The Motley Fool recommends Diageo. 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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