Rise in Diageo share price

[Nimrod103]

I see that Diageo has risen by about 70% over the course of the last 2.5 years, yet before that they flatlined for several years. I thought that consumer drinks was a fairly mundane predictable business, so I am curious if anyone can explain this stratospheric rise, and predict if it will continue.

[SalvorHardin]

I see that Diageo has risen by about 70% over the course of the last 2.5 years, yet before that they flatlined for several years. I thought that consumer drinks was a fairly mundane predictable business, so I am curious if anyone can explain this stratospheric rise, and predict if it will continue.

Diageo has for many years been cheap compared to the other major spirits producers, notably Pernod-Ricard and Brown-Forman, so it looks as if the market is closing this gap (it's P/E ratio is now very similar to Pernod-Ricard though still at a big discount to Brown-Forman).

The outlook for emerging markets is pretty good. Nick Train of Lindsell Train recently said, in a Finsbury Growth & Income video, that there had been a big increase in sales of scotch to South America

Could be investors focusing more on strong brands, if which Diageo has a lot. Compare with the weak brands of KraftHeinz, for example. Spirits are stronger brands than beers, with many more global brands than beer.

Could be a bit of moving from beer to spirits, due in part to the problems of Anheuser-Busch Inbev.

[Alaric]

Could be investors focusing more on strong brands, if which Diageo has a lot.

They've being doing quite a bit of buying back shares which may have helped drive up the price. But that in itself suggests they have cash to spare indicative of making good profits.

[Nimrod103]

Thanks for the comments. I have trying to diversify my share portfolio lately, as I have become very concentrated in oil and gas. But that is an industry I know something about.
I am finding companies often quoted as bellweathers (e.g. Vodafone, Diageo and drugs companies) very difficult to comprehend, and predict how they might continue as good businesses in the long term.

[Alaric]

I am finding companies often quoted as bellweathers (e.g. Vodafone, Diageo and drugs companies) very difficult to comprehend, and predict how they might continue as good businesses in the long term.

Companies relying on consumers should not be too difficult. What do they make or distribute? Who buys it? Can they continue to sell at a profit? With the hindsight of Tesco, perhaps add, are their accounts reliable?

[SalvorHardin]

Thanks for the comments. I have trying to diversify my share portfolio lately, as I have become very concentrated in oil and gas. But that is an industry I know something about.
I am finding companies often quoted as bellweathers (e.g. Vodafone, Diageo and drugs companies) very difficult to comprehend, and predict how they might continue as good businesses in the long term.

Diageo is a distiller which sells premium spirits worldwide, which happens to own one of the few genuinely global beer brands. That's a business which isn't exposed to technological change and where there are strong brand identities and consumer loyalties. I feel fairly confident that it will be around for a long time, selling more particularly in the developing world (premium alcohol is a luxury good so sales rise strongly when incomes rise).

Vodafone's business is horribly exposed to technological change (5G could shake up the business), large capital expenditures (lots of debt?) with rapid obsolescence, and is in a sector where there doesn't seem to be too much brand strength (consumers seem to be keen on switching networks at the drop of a hat). Vodafone's huge yield is a big warning sign for me.

Drug companies are exposed to patent expiration; they have to keep reinventing themselves. And there's some unusual accounting in the sector with the use of "core eps" which to me seems like "earnings excluding some costs we feel like ignoring".

As you might have guessed I own shares in Diageo, but none of the others mentioned above

[Nimrod103]

I am finding companies often quoted as bellweathers (e.g. Vodafone, Diageo and drugs companies) very difficult to comprehend, and predict how they might continue as good businesses in the long term.

Companies relying on consumers should not be too difficult. What do they make or distribute? Who buys it? Can they continue to sell at a profit? With the hindsight of Tesco, perhaps add, are their accounts reliable?

Consumers can be very fickle though, and supermarkets are a case in point where their brand seems to count for little, so there is opportunity for discounters like Aldi and Lidl to expand at their expense. Tesco seem to be going well at present, while my impression locally is that Sainsbury has lost the plot and no longer knows how to manage a store.
Alcohol consumption in the UK has been flat for years, but I am not sure about the export situation. As far as Diageo goes, I still cannot see where there has been such an expansion of business to justify the huge jump in share price.

[SalvorHardin]

Alcohol consumption in the UK has been flat for years, but I am not sure about the export situation. As far as Diageo goes, I still cannot see where there has been such an expansion of business to justify the huge jump in share price.

I reckon that a big part of Diageo's share price rise has been caused by the market valuing it more closely to Pernod Ricard, its biggest competitor. I also believe that a part of this rise is the market deciding to price spirits more like luxury goods than other forms of alcohol (in particular beer).

For many years I've considered buying Pernod-Ricard shares, but they always used to trade at a much higher P/E ratio than Diageo. Every time I've looked Pernod-Ricard's P/E has been 6 to 10 points higher than Diageo's. Now Pernod-Ricard's historic PE is 26 whereas Diageo's P/E is 25 (respective EPS growth is +13.2% and +12.5%, so there's not much difference there - I haven't looked further at Pernod-Ricard's accounts).

Brown-Forman (Jack Daniels) trades at a P/E of about 38. Ever since I've owned Diageo these have always traded at a much higher P/E.

Suntory's P/E is about 19, though Suntory Group has a lot of food interests which is going to push down its P/E compared to what its spirits businesses (Jim Beam, Maker's Mark, Canadian Club, Teacher's, etc.) would trade on if they were separately quoted.

As to UK sales, according to the 2017-2018 annual report, 24.2% of Diageo's sales were made in Europe & Turkey. It doesn't give a separate figure for the UK, I'd be surprised if it is more than 7%-8%. The UK's importance to Diageo is primarily as a producer for export, rather than a consumer.

Beer, wine and spirits are very different markets; it's best to treat them separately. Beer sales in the UK continue to decline whilst spirits sales continue to rise.

[ADrunkenMarcus]

Alcohol consumption in the UK has been flat for years, but I am not sure about the export situation. As far as Diageo goes, I still cannot see where there has been such an expansion of business to justify the huge jump in share price.

I reckon that a big part of Diageo's share price rise has been caused by the market valuing it more closely to Pernod Ricard, its biggest competitor. I also believe that a part of this rise is the market deciding to price spirits more like luxury goods than other forms of alcohol (in particular beer)

I think that's a key possibility.

I've held Diageo since October 1998. Since that time, the share price rose from 553p to the recent peak of 3144p - a gain of 468.4% or 8.6% CAGR. However, the dividend yield started around 3.2% and is now 2.2% (the dividend has risen at 6.6% CAGR) so part of that performance has been a higher rating. Nonetheless, simply adding the cash dividends onto the share price gain and the total return is about 611% or 9.8% CAGR. It's a steady eddy.

At present, Diageo's free cash flow yield is showing as 3.7% on Sharepad's 2019 estimates and rising to 4.1% for 2021. That's not cheap, but nor is it outrageous for a company of its quality. Ten year average return on capital employed is showing at 17%.

Brown Forman's shares are showing as a free cash flow yield of 3% for 2019.

Best wishes

Mark.

[SalvorHardin]

Nick Train, manager of the Finsbury Growth & Income Investment Trust, talked about Diageo in October 2018. Starting at 5 mins 20 seconds he comments that over the 12 months to June 2018 global shipments of Scotch Whisky were up by 12% on the previous 12 months. Two main reasons for this: "Latin America has stopped getting worse" (they drink a lot of Scotch) and demand for premium spirits in Asia and China continues to grow.

The video is on the landing page of the trust's website

https://www.finsburygt.com/

Diageo is Finsbury Growth & Income's biggest holding, 10.4% of the trust's investments as of 28th Feb 2019 (Unilever is third at 9.5%).

The rise in Far Eastern demand is consistent with spirits being a luxury good in the economic sense (as income rises the proportion of income spent on luxury goods increases by a greater amount). In contrast beer seems to behave like a normal good so rising incomes do not see a larger increase in spending on beers (whilst some beers (craft beers) are luxury goods, many cheap beers are inferior goods (e.g. Mild) so spending on them falls as incomes rise).

https://www.economicshelp.org/blog/790/ ... al-luxury/

[YeeWo]

Code: Select all

Date      | Type       | No.  | SP      | Price       | Fee     | XIRR flow   |         |         
12-Jan-11 | BUY        |  175 | £12.165 |   £2,128.88 |  £23.66 |   £2,152.54 |         |         
06-Apr-11 | CASH DIVI  |      |         |     -£27.12 |         |     -£27.12 |         |         
19-Apr-11 | BUY        |  175 | £12.022 |   £2,103.88 |  £23.53 |   £2,127.41 |         |         
24-Oct-11 | CASH DIVI  |      |         |     -£87.15 |         |     -£87.15 |         |         
12-Apr-12 | CASH DIVI  |      |         |     -£58.10 |         |     -£58.10 |         |         
23-Apr-12 | BUY        |  350 | £15.720 |   £5,502.23 |  £40.53 |   £5,542.76 |         |         
24-Apr-12 | SELL       | -350 | £15.580 |  -£5,453.22 |  £12.95 |  -£5,440.27 |         |         
11-Sep-12 | BUY        |  350 | £17.003 |   £5,951.05 |  £42.77 |   £5,993.82 |         |         
22-Oct-12 | CASH DIVI  |      |         |     -£94.15 |         |     -£94.15 |         |         
08-Apr-13 | CASH DIVI  |      |         |    -£126.70 |         |    -£126.70 |         |         
03-Oct-13 | CASH DIVI  |      |         |    -£205.10 |         |    -£205.10 |         |         
07-Apr-14 | CASH DIVI  |      |         |    -£137.90 |         |    -£137.90 |         |         
10-Jul-14 | BUY        |  590 | £18.615 |  £10,982.85 |  £68.93 |  £11,051.78 |         |         
02-Oct-14 | CASH DIVI  |      |         |    -£412.80 |         |    -£412.80 |         |         
07-Apr-15 | CASH DIVI  |      |         |    -£277.35 |         |    -£277.35 |         |         
16-Sep-15 | SELL       | -540 | £17.810 |  -£9,621.10 |  £12.95 |  -£9,608.15 |         |         
08-Oct-15 | CASH DIVI  |      |         |    -£450.21 |         |    -£450.21 |         |         
07-Apr-16 | CASH DIVI  |      |         |    -£169.50 |         |    -£169.50 |         |         
06-Oct-16 | CASH DIVI  |      |         |    -£274.50 |         |    -£274.50 |         |         
06-Apr-17 | CASH DIVI  |      |         |    -£177.75 |         |    -£177.75 |         |         
05-Oct-17 | CASH DIVI  |      |         |    -£288.75 |         |    -£288.75 |         |         
03-Jan-18 | SELL       | -250 | £26.710 |  -£6,677.50 |  £10.50 |  -£6,667.00 |         |         
05-Apr-18 | BUY        |  250 | £24.685 |   £6,171.25 |  £41.41 |   £6,212.66 |         |         
06-Apr-18 | CASH DIVI  |      |         |    -£124.50 |         |    -£124.50 |         |         
29-May-18 | SELL       | -250 | £27.616 |  -£6,904.06 |   £7.95 |  -£6,896.11 |         |         
19-Sep-18 | BUY        |  250 | £26.080 |   £6,520.00 |  £40.55 |   £6,560.55 |         |         
04-Oct-18 | CASH DIVI  |      |         |    -£202.00 |         |    -£202.00 |         |         
12-Dec-18 | SELL       | -375 | £28.370 | -£10,638.75 |   £8.95 | -£10,629.80 |         |         
25-Jan-19 | BUY        |  375 | £27.295 |  £10,235.63 |  £62.68 |  £10,298.31 |         |         
29-Mar-19 | CURR. VAL. |      |         |             |         | -£23,171.25 |         |         
          |            |      |         |             |         |      13.03% | XIRR    |         
          |            |      |         |             |         |             |         |         
          |            |      |         |             |         |             |         |         
          |            |      |         |     7187.56 | £397.36 |  £ 7,584.92 | £ 10.11 | Avg Price
          |            |      |         | Share Price | £ 30.90 | £ 23,171.25 |         |         
          |            |      |         |             |         |     205.49% |         |         
          |            |      |         | MoS/Loss    |         | £ 15,586.34 |         |         


- My innings with Diageo.
- Clearly the decision to trim on 16 Sep 15 has proved unwise!
- Time to leave tinkering alone, be glad for the margin of safety I have and collect the dividends........

[ADrunkenMarcus]

My innings with Diageo.- Time to leave tinkering alone, be glad for the margin of safety I have and collect the dividends........

Recent highs seem to be 3500p early in July 2019, taking my total return to 675% (simply adding up capital gain per share plus dividend per share) or 10.2% CAGR.

I topped up in 2017 at under 2300p and in 2018 at under 2700p.

However at recent highs even the 2021 forecast dividend represents a yield of 2.2% and the current year yield is 2%. This is markedly down on the 3.2% dividend yield they started with in 1998. A buy-and-hold-forever for me, but it's undoubtedly significantly more highly rated for anyone thinking of buying in now.

Best wishes

Mark.

[YeeWo]

Recent highs seem to be 3500p early in July 2019, taking my total return to 675% (simply adding up capital gain per share plus dividend per share) or 10.2% CAGR. I topped up in 2017 at under 2300p and in 2018 at under 2700p. However at recent highs even the 2021 forecast dividend represents a yield of 2.2% and the current year yield is 2%. This is markedly down on the 3.2% dividend yield they started with in 1998. A buy-and-hold-forever for me, but it's undoubtedly significantly more highly rated for anyone thinking of buying in now. Best wishes Mark.

As you referenced in my Q2 review, this is in the "Foreign Earnings" category business-wise. When/and/or if Sterling denominated earnings rise as a consequence of revenue growth or currency weakness I have faith the Investment Community will put appropriate pressure on the Diageo board to either/or initiate buybacks and/or increase the dividend. Neither scenario will be ruinous for the UK based £ investor........

[westmoreland]

it's clearly a quality company, but the market has figured this out. i'd add that the share buyback has been funded by increasing debt.

it's grown strongly in the last few years, though.

[ADrunkenMarcus]

it's clearly a quality company, but the market has figured this out. i'd add that the share buyback has been funded by increasing debt. .

I'd rather they'd bought back shares in the early 2010s when it was £12, £13, £14... Companies are notorious for buying back shares at the wrong time.

I don't object to them taking on debt if they can get a return on the proceeds for more than the cost of the debt.

Best wishes

Mark.

[Alaric]

However at recent highs even the 2021 forecast dividend represents a yield of 2.2% and the current year yield is 2%. This is markedly down on the 3.2% dividend yield they started with in 1998. A buy-and-hold-forever for me, but it's undoubtedly significantly more highly rated for anyone thinking of buying in now.

Similar effects are seen in other Companies with good track records of profits and increasing dividends.

The dividend increases every year, but generally so also does the share price. When the share price grows faster than the dividend increase, the headline dividend yield reduces. For a holder that's a nice problem to have, even if it makes topping up more expensive.

[ADrunkenMarcus]

Yes, there are far worse problems to have!

Looking at forecasts (whether they're worth anything, or not) for 2020, 2021 and 2022 we see:

earnings per share annual growth for these years in the range between 7.9 and 9.6%;
dividend per share growing to almost 83p in 2022;
free cash flow yield of 4.1% on 2022 forecasts

Best wishes

Mark.