Shares in focus: Diageo, a premium drinks giant

published 9 September 2011

What is Diageo?

Diageo is the world's leading premium alcoholic drinks business. Its leading brands include Johnnie Walker whisky, Smirnoff vodka, Baileys liqueur, Captain Morgan rum, Jos Cuervo tequila, Tanqueray gin, and Guinness. The company trades in more than 80 markets and had sales of £9.9bn in the year to June 2011.

What is the company's history?

Diageo was created through the merger of Guinness and Grand Metropolitan in 1997. Guinness can trace its history back to 1759 when Arthur Guinness opened a brewery in Dublin. Grand Metropolitan, on the other hand, began life in 1934 as a hotel company known as MRMA Ltd. It entered the spirits business during the 1970s via its purchase of International Distillers and Vintners. Guinness became a major player in spirits following its acquisition of Distillers Company in 1986. In 1988, Grand Metropolitan attempted to diversify by acquiring Pillsbury, which contained the major household brands of Hagen-Dazs, Green Giant and the Burger King chain. In 2000, Diageo sold its food businesses to concentrate on drinks. It gained further global scale by acquiring Seagram's drinks business in 2001.

Who runs Diageo?

Paul Walsh has been chief executive since 2000. He joined Grand Metropolitan's brewing business in 1982 and was previously CEO of Pillsbury. His total pay was £3.2m in 2010. Franz Humer is chairman and Deidre Mahlan is finance director.

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How's trading?

Quite good. Results for the year to June 2011 saw steady revenue growth of 5% to £9.9bn. This was due to a combination of volume growth, price increases and lower discounting. Premium vodka and scotches (increasingly popular in emerging markets) in particular saw very strong rates of sales growth. High operating margins of 29% were maintained with operating profits of £2.9bn. Lower interest and tax charges led to a 16.1% increase in earnings per share (EPS) to 83.6p and a 6% increase in the annual dividend to 40.4p per share.

What's the outlook for Diageo?

The company is quite bullish about its medium-term prospects. It expects emerging markets and their rising numbers of middle-class consumers to account for 50% of group sales by 2015. Diageo believes that this trend can deliver 6% organic (non-acquisition-based) sales growth. Continued efficiency gains are aimed at increasing operating margins by 2% by 2014. If successful, Diageo should be able to achieve double-digit annual EPS growth over the period and accelerate the growth of dividend payouts.

The analysts

Of the 37 analysts surveyed by Bloomberg, 25 say "buy", ten "hold" and two "sell". The average price target is 1,374p 13% above the current share price. Most bullish is Kepler Capital with a 1,450p price target, whereas JP Morgan is most bearish with a 1,175p target. Our view: Diageo is a quality company, but the p/e isn't especially cheap. A good stock to buy if stockmarkets fall further one for the watchlist.

The numbers

Stockmarket code: DGE

Share price 1,215p

Market cap: £30.4bn

Net assets (June 2011) £6.0bn

Net debt (June 2011) £6.5bn

P/e (current year estimate) 13.8

Yield (prospective) 3.5%

Directors' dealings

There have been some modest purchases by Diageo directors during the last year the dates are shown on the chart. Most have been related to the exercising of options or company share plans. Notably, CEO Paul Walsh has been a net seller of shares. Diageo has share ownership guidelines that stipulate that the CEO and CFO must respectively holdat least 300% and 250% of their annual base pay in company shares.

Director and shares held

P Walsh: 150,000

D Mahlen: 12,084

F Humer: 3,336

A Fennell: 42,804

G Ghostine: 10,883

B Holden: 5,200

D Gosnell: 14,518

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.