Dividend Analysis: Diageo

Diageo plc engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine worldwide.
Diageo is an international dividend achiever. It has been increasing its dividends for the past 10 consecutive years. From the end of 1997 up until August 2008 this dividend growth stock has delivered an annual average total return of 10.90 % to its shareholders. Diageo is the first international dividend company that I have analyzed in my pursuit of international exposure for my stock portfolio.

At the same time the company has managed to deliver a 7.20% average annual increase in its EPS since 1998.

The ROE has increased from 29% in 1998 to 36% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 8.10% each year, which is higher than the growth in EPS. An 8% growth in dividends translates into the dividend payment doubling almost every 9 years. DEO has indeed managed to double its annual dividend payment of $1.395 in 1999 last year (2007).

If we invested $100,000 in DEO on December 31, 1997 we would have bought 2892 shares. In April 1998 your semi-annual dividend income would have been $2406. If you kept reinvesting the dividends though instead of spending them, your semi-annual dividend income would have risen to $6582 in September 2007 and $4272 by June 2008. For a period of 10 years, your annual dividend income would have increased by 67%. If you reinvested it though, your annual dividend income would have increased by 129.60%.

 

The dividend payout has remained above 50% for the majority of our study period with the exception of 2006. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that DEO is attractively valued with its low price/earnings multiple of 16 and above average yield at 3.60%. Even though the dividend payout is higher than the 50% I like the fact that it is has been steadily decreasing over the past decade.

I will keep looking for growing internationally based corporations which have increased their dividends and earnings consistently for at least five to ten years.

Disclosure: I do not own shares of DEO

Comments

[Michael Raf...:]

Good article

2008 Aug 31 10:05 AM

[WEBISKING:]

Diageo is a great company but buying MO or PM is MUCH better for your overall portfolio. With a 6% and 4% dividend these dividends were just raised 10.3 and over 17% annually last week. If you want international exposure PM is your answer.Author is on the right track and his "measuremnets" are great tools.Just plug in Mo and PM to his parameters and you will become financially independent.I know because it happened to me

2008 Aug 31 12:02 PM

[tipalia:]

excellent article, I do own DEO mostly for it s ROE but one cannot ignore it s dividend indeed. Well WEBISKING there are many ways to look at things : there will always be greener grass somewhere and your glass can be half empty or half full. We understand your point but we do understand also Dobromir s point. By the way speaking of dividends did you take a close look at FRO?
TIPSTER

2008 Sep 01 10:42 AM

[Fam62c:]

I own PM and DEO and I think that you can't go wrong with these. I don't see tobacco and alcohol ever going out of style. I like PM better than MO because I believe that there is more potential with tobacco in places other than the USA. These are well run companies with established top shelf brands that have tremendous value; they make great "forever" stocks for a portfolio. DEO can make the same brands forever with a great profit margin; all they have to do is make sure they keep marketing aggressively to create new customers and keep the competitors from gaining a foothold. One of my other favorites is MCD if you need a good dividend increaser with a durable long term theme. If you like the "vice" investing theme another good place to look now is at some of the gaming stocks. They have been really beaten down hard and gambling, like alcohol and tobacco, isn't going away anytime soon and should become more prevelant as the world economy grows. My favorite stocks in the gaming space are PENN and MPEL. Happy investing.

2008 Sep 01 10:55 AM

[tipalia:]

100% with you fam62c concerning gaming stocks.You see a lot of retirees in those places today and that group of people represent an important % of our population. Mself I like MGM ,LVS and

2008 Sep 01 01:32 PM

[tipalia:]

....BYD maybe. I will take a few minutes to look at your choices PENN and MPEL,never heard of these before.
TIPSTER

2008 Sep 01 01:36 PM

[notsosmart:]

do i ever agree with user138602.take a look at FRO. i have no connection to wall st or this stock exept as a happy shareholder.the ceo of FRO gets no pay.only dividends.all co's should be run tis good.hope it never ends.

2008 Sep 01 03:59 PM