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On Diageo's Share Price

Mar. 05, 2020 4:02 AM ETDiageo plc (DEO)16 Comments
John Kingham profile picture
John Kingham


  • Diageo operates globally in defensive beverage markets, which are expected to grow in terms of volume and/or profit margin for the foreseeable future.
  • Since the peak of the last bull market in 2007, Diageo share price has increased by about 180%. Over that same period, its dividend has increased by about 110%.
  • The fact that the company’s dividend has growth more slowly than the share price inevitably means that the dividend yield on offer today is lower than it was a decade or so ago.

Diageo's share price has increased by more than 300% since the financial crisis of 2009. In this article, I argue that the share price is somewhat stretched and that expected returns are not particularly attractive. I also calculate a target price at which I would be happy to invest.

Diageo is a well-known and generally much-liked business. It develops and manufactures alcoholic drinks such as Smirnoff, Guinness and Johnnie Walker, which it then sells into more than 180 countries.

Diageo is a member of the FTSE 100 and has an enterprise value (i.e., the market value of shareholder equity plus debt) of around £87 billion, so it's a very large and high-profile company.

Emerging market expansion and developed market premiumisation

Diageo's strategy for growth is to take advantage of two long-term trends:

  1. Emerging market expansion and
  2. Premiumisation of alcoholic drinks in developed markets

Emerging market expansion: As emerging markets grow, their populations will usually have more disposable income. That income allows them to either a) buy alcoholic drinks they couldn't previously afford, b) buy legal drinks rather than black market drinks and c) buy more expensive and "aspirational" international brands rather than cheaper local brands.

Diageo expects an additional 750 million consumers to be able to afford international brand spirits by 2030, which is a lot by any sensible definition.

Diageo tries to increase the amount and quality of alcohol drunk in these countries by offering a mix of both international and local brands at a variety of price points. The company's long-term goal is to help these markets go through the same process of drink premiumisation as is currently occurring in developed markets.

Developed market premiumisation: In the US, many beer drinkers are upgrading to premium "craft" beers or

This article was written by

John Kingham profile picture
I write about high-quality UK dividend growth stocks and value them on an intrinsic value basis using discounted dividend models.

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Comments (16)

Librarian Capital profile picture
"A long and consistent track record of growth" is the wrong conclusion to draw about Diageo, even before Covid-19.

You can see even from the "financial results" chart above that there's a multi-year period between 2013 and 2016 when revenues and earnings were flat to declining.
John Kingham profile picture
Yes but very few companies (probably zero) produce growth of revenues, eps, dividends, capital employed etc in every single year for decades. All companies have good and bad years and so it is quite normal for even the very best companies to have short periods (2013-2016 is short) where progress is weak or even negative.
Wake me up at $70 per share.
MathRulz profile picture
For those who want to see some of the author’s Interesting responses to commenters, click the link to the “Original Post” at the end of the article.
BM Cashflow Detective profile picture
Thank you.
I did this.
My own analysis came to the same result.
A great quality company without a margin of safety!
OK, looking somewhat ahead, in 20-input DCF model of return over 10 years for NYSE shares DEO. Growth rate entered as 7% which is less than some assume. Long-term Treasury rate assumed 3%--down from 5% when the model was developed a while ago yet acting as a margin of safety for today. Computed intrinsic as $135. Which is almost exactly the low market price at the time.
Overvaluing with those numbers.
This is a superb company and one to be held as a long term investment. It's one of the luxury goods companies that does not sell at a very high multiple of earnings. Its products have good growth opportunities, especially in developing markets. I've held the underling London shares (DGE) since the company was Grand Metropolitan PLC, and my very successful position has a cost basis around £6. It closed today in London at £ 28.065, well off the 52-week high of £ 36.335. I am not recommending any particular entry price, but I think that an investor buying even now will do well over the long term.
The article would be much more helpful and credible if it were to try to evaluate the business Diageo is in and their success in executing strategy to date and likelihood they will have success going forward, versus merely crunching historical numbers and extrapolating forward. I would imagine companies that made buggy whips in the days when they were needed had a good set of numbers too. However, this analysis is always a good place to start and in this case, Diageo is the top company in its sector, by a long way, and I expect it will continue to remain king of the castle for some time. It is a great sector and as a LT holding Diageo is pretty safe. LT holder with industry experience.
Long Time Running profile picture
With interest rate cuts, money is gotten cheaper on top of that QE has flooded the markets with more dollars, inflating stock prices even more.
Librarian Capital profile picture
With respect, this article appears to be of the cookie-cutter variety where historic financial figures are fed into a standard toolset to quickly generate content.

In particular, simply taking the average figure "over the last ten years" when Diageo's financials (which are in British pounds) have been affected by the devaluation of emerging market currencies (but also British pounds), a confluence of problems in FY13-15 and of course Covid-19 now is unlikely to add much value on what would happen in the future.

As a matter of fact, Diageo's Dividend Yield is 2.5% as of yesterday's closing price (not 2.2%), Free Cash Flow after dividends is worth another 1.0-1.5% but used in buybacks, and management has a stated goal of growing EBIT organically by 5-7% over the medium term - so actually even on the contributor's methodology the shares will already generate an approx. 10% annual return (taking the mid-point of the figures).

And there is almost no chance of Diageo reaching the 1,700p entry price the contributor is hoping for, bar a major global market crash.
What does 1720 equate to in dollars?
In this low yield environment the 10% is too high and 8% total return in some blue chip is acceptable. So I rate Diageo as hold.
timddeb profile picture
as usual, high quality research. thanks. I have been a long time holder so will continue
captaindividend profile picture
I think you might be over optimistic with regards to expecting a 4% divi from this safe (if anything these days is safe) world player - I would be interested by the names and current div from the top of your consistent payers list - imagine Vod was there till quite recently
John Kingham profile picture
A 4% yield or so is the level at which I might buy, but that doesn't mean I'm expecting or hoping for that level. I'm indifferent because there are plenty of other fish in the sea, but if Diageo did for some reason end up at that level then I would definitely be interested.

As for stocks from my list, that's behind a paywall I'm afraid (I have to pay the bills somehow) but Vodafone hasn't been near the top since about 2017. I did hold Vodafone for a long time, from 2011 to 2019. In 2011 I knew a lot less about what makes a company good or bad, but as I learned more and as Vodafone's position weakened it eventually became clear that it was not and probably never would be a high quality, high return business, so I sold.
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