Diageo (DGE)

[idpickering]

Prelims; https://www.investegate.co.uk/diageo-pl ... 00186444G/

[idpickering]

Diageo plc return of capital programme https://www.investegate.co.uk/diageo-pl ... 00244705H/

[idpickering]

This announced yesterday;

Diageo issues trading commentary ahead of AGM 2019

Ivan Menezes, Chief Executive, commented:

"Fiscal 20 has started well as we continue to build on the momentum and consistent progress we are making in the execution of our strategy. Our focus remains on delivering quality sustainable growth. This is supported by a culture of everyday efficiency that enables us to invest smartly in marketing and growth initiatives while expanding margins.

https://www.investegate.co.uk/diageo-pl ... 00158792M/

Chat over on HYP Practical please.

Ian.

[idpickering]

Change in method for calculating organic non-GAAP measures

Diageo announced, at its Capital Markets Day on 22 May 2019, that it would change its method of calculating organic growth for periods beginning with the six months ending 31 December 2019. Organic growth is a non-GAAP financial measure. See 'Explanatory Notes' below for an explanation and reconciliation of non-GAAP measures.

Going forward, Diageo will calculate the exchange adjustment included in the organic movement calculation by translating the current period results at the prior period weighted average exchange rates. Previously, Diageo had calculated the exchange adjustment included in the organic calculation by translating the prior period results at the current period exchange rates.

This change in methodology will significantly simplify Diageo's internal reporting processes by more closely aligning its calculation of organic movements with its internal management reporting. Diageo also believes this methodology will allow investors to better compare Diageo's organic movements with its peer group listed on page 92 of the Annual Report 2019.

https://www.investegate.co.uk/diageo-pl ... 00064074V/

[idpickering]

Interims here; https://www.investegate.co.uk/diageo-pl ... 00093572B/

[idpickering]

Trading Update - Impact of COVID-19 outbreak

When we released our interim results on 30 January 2020, we commented on the expectation of an impact from the Coronavirus (COVID-19) outbreak, which we were not able to quantify at the time. We are now providing an update on the expected range of the adverse impact in fiscal 2020 of the evolving COVID-19 situation.

As the situation continues to unfold, our primary concern remains the welfare of our colleagues, their families and their local communities and we will continue to provide all support possible. Authorities in China and in other impacted countries have taken strong and decisive action and continue to work tirelessly to contain the spread of the virus.

Full item here; https://www.investegate.co.uk/diageo-pl ... 00031219E/

[vrdiver]

Trading Update - Impact of COVID-19 outbreak

When we released our interim results on 30 January 2020, we commented on the expectation of an impact from the Coronavirus (COVID-19) outbreak, which we were not able to quantify at the time. We are now providing an update on the expected range of the adverse impact in fiscal 2020 of the evolving COVID-19 situation.

As the situation continues to unfold, our primary concern remains the welfare of our colleagues, their families and their local communities and we will continue to provide all support possible. Authorities in China and in other impacted countries have taken strong and decisive action and continue to work tirelessly to contain the spread of the virus.

Full item here; https://www.investegate.co.uk/diageo-pl ... 00031219E/

Further extract from the link Ian provided:

On this basis, we estimate the negative impact in fiscal 2020, on the group's organic net sales and organic operating profit, to be in a range of £225m to £325m and £140m to £200m, respectively, with the timing and pace of recovery determining the impact within these estimated ranges. The COVID-19 situation is dynamic and continues to evolve and these ranges exclude any impact of the COVID-19 situation on other markets beyond those mentioned above. We will continue to monitor the situation closely.

From the 2019 results, profit before tax was approx £3.9b, so call it £4b with an impact of £0.2b, or 5% (assuming organic = like-for-like and no new acquisitions are included in the £200m impact figure).

In the meantime the share price is 12% off its January high. Worth topping up, or hold on for a further drop?

VRD

[dealtn]

Further extract from the link Ian provided:

On this basis, we estimate the negative impact in fiscal 2020, on the group's organic net sales and organic operating profit, to be in a range of £225m to £325m and £140m to £200m, respectively, with the timing and pace of recovery determining the impact within these estimated ranges. The COVID-19 situation is dynamic and continues to evolve and these ranges exclude any impact of the COVID-19 situation on other markets beyond those mentioned above. We will continue to monitor the situation closely.

From the 2019 results, profit before tax was approx £3.9b, so call it £4b with an impact of £0.2b, or 5% (assuming organic = like-for-like and no new acquisitions are included in the £200m impact figure).

In the meantime the share price is 12% off its January high. Worth topping up, or hold on for a further drop?

VRD

So look at those two "loss" ranges.

Net Sales £225m to £325m. Operating Profit £140m to £200m.

So treat those as a ratio and see how wonderful the (marginal) operating profit margin is. Give me high margin, high ROCE businesses over the opposite any day, but particularly on days when they are cheaper!

[idpickering]

Even with the recent drop in sp of this company I’m not tempted to buy more. I hold these in my HYP and have done for years, but the 2.4% dividend yield doesn’t tempt me. I’m happy to hold onto my DGE shares though.

Ian.

[dealtn]

Even with the recent drop in sp of this company I’m not tempted to buy more. I hold these in my HYP and have done for years, but the 2.4% dividend yield doesn’t tempt me. I’m happy to hold onto my DGE shares though.

Ian.

Genuine question, posed on a board unlikely to cause any offence, intentional or otherwise.

You seem focused on the absolute yield level above all else, and that's fine as its your decision and your portfolio. But how do you rank a low yield that consistently grows (around 5% a year for over 5 years in this case) against a high yield that is static? I naturally assume you would rank a high, and growing yield share above all others (if you can find them).

[idpickering]

Even with the recent drop in sp of this company I’m not tempted to buy more. I hold these in my HYP and have done for years, but the 2.4% dividend yield doesn’t tempt me. I’m happy to hold onto my DGE shares though.

Ian.

Genuine question, posed on a board unlikely to cause any offence, intentional or otherwise.

You seem focused on the absolute yield level above all else, and that's fine as its your decision and your portfolio. But how do you rank a low yield that consistently grows (around 5% a year for over 5 years in this case) against a high yield that is static? I naturally assume you would rank a high, and growing yield share above all others (if you can find them).

Thanks for your input. As a HYPer I am more focussed on high yielding shares. I'd prefer that the dividends of all my 29 holdings in my HYP were rising over time, but some have been held static for what seems like eons. It's not ideal I grant you, but I can forgive the few of mine that are static, Shell RDSB etc, due to the high yield it, and others offer. Each holding of the 29 are important for the diversification I like to have in my HYP. Alongside my DGE holdings I also have MARS ( a higher yielder) on board. I get that they're not the same, but to me they're both offering alcoholic beverages. Obviously I could sell DGE and buy another high yielder, but I like the steady quality DGE offers.

Ian.

[daveh]

Genuine question, posed on a board unlikely to cause any offence, intentional or otherwise.

You seem focused on the absolute yield level above all else, and that's fine as its your decision and your portfolio. But how do you rank a low yield that consistently grows (around 5% a year for over 5 years in this case) against a high yield that is static? I naturally assume you would rank a high, and growing yield share above all others (if you can find them).

I value it via the time it would take for the fast growing low yield share to pay me the same in dividends as the high yielding static dividend share. So how long would it take for DGE paying a yield of ~2.5% growing at 5% per annum to have paid the same as RDSB yielding a static 8%?

Assuming I buy the same £10k worth of shares I get £250 from DGE and £800 from Shell. If all remains the same I don't get £800 per year from DGE until year 25 and at that point I will have received £11,931.77 from DGE and £20,000 from Shell and its not until year 42 that the total paid from DGE overtakes Shell (£33807.94 compared to £33600.00). So thats why i like high yielding shares> I'm not going to be here in 42 years (I might be in 25 just).

[kempiejon]

Genuine question, posed on a board unlikely to cause any offence, intentional or otherwise.

You seem focused on the absolute yield level above all else, and that's fine as its your decision and your portfolio. But how do you rank a low yield that consistently grows (around 5% a year for over 5 years in this case) against a high yield that is static? I naturally assume you would rank a high, and growing yield share above all others (if you can find them).

I value it via the time it would take for the fast growing low yield share to pay me the same in dividends as the high yielding static dividend share. So how long would it take for DGE paying a yield of ~2.5% growing at 5% per annum to have paid the same as RDSB yielding a static 8%?

Assuming I buy the same £10k worth of shares I get £250 from DGE and £800 from Shell. If all remains the same I don't get £800 per year from DGE until year 25 and at that point I will have received £11,931.77 from DGE and £20,000 from Shell and its not until year 42 that the total paid from DGE overtakes Shell (£33807.94 compared to £33600.00). So thats why i like high yielding shares> I'm not going to be here in 42 years (I might be in 25 just).

daveh I think you've fallen into the trap, you've not accounted for the high capital appreciation available from low yielders. In those 25 years low yielding DGE will have increased in value at over 5% per year as well so you can sell some shares to balance out the income shortfall and high yielding RDSB will hardly have increased at all.

[Alaric]

So how long would it take for DGE paying a yield of ~2.5% growing at 5% per annum to have paid the same as RDSB yielding a static 8%?

A static Shell at 8% is a theoretically better return than an increasing Diageo at 7.5% ( 2.5% + 5%). The simple minded proof is that if in a year's time, market evaluations are unchanged, the holder of Shell will see no growth but a dividend of 8%, whilst the holder of Diageo will have a 2.5% dividend and a share price growth of 5%.

But it makes little sense to compare dividends without making at least some attempt to factor in their potential increases and the potential increase or decrease in the share price.

[daveh]

daveh I think you've fallen into the trap, you've not accounted for the high capital appreciation available from low yielders. In those 25 years low yielding DGE will have increased in value at over 5% per year as well so you can sell some shares to balance out the income shortfall and high yielding RDSB will hardly have increased at all.

Alternatively I can reinvest some of that dividend from Shell into more shares (which don't necessarily have to be Shell) and thereby increase my capital and dividend going forward. Its swings and roundaboouts and where you see the share price and dividend going. Will Shell have to cut its dividend or will it be able to start growing it again, will DGE be able to keep growing it dividend or will the growth stall and when it is no longer a stellar grower of dividends what happens to its share price? For example Imperial brands grew its dividend at 10% for years - but look at it now.


Me I prefer the bird in hand. 25 and 42 years is a long time to wait to get the same amount of cash and a lot can change in that time. Also if I need the cash now I might be selling shares at a poor time when the price is depressed due a global pandemic for instance. I have no worries if the dividend is sufficient for my needs.

[dealtn]

Genuine question, posed on a board unlikely to cause any offence, intentional or otherwise.

You seem focused on the absolute yield level above all else, and that's fine as its your decision and your portfolio. But how do you rank a low yield that consistently grows (around 5% a year for over 5 years in this case) against a high yield that is static? I naturally assume you would rank a high, and growing yield share above all others (if you can find them).

I value it via the time it would take for the fast growing low yield share to pay me the same in dividends as the high yielding static dividend share. So how long would it take for DGE paying a yield of ~2.5% growing at 5% per annum to have paid the same as RDSB yielding a static 8%?

Assuming I buy the same £10k worth of shares I get £250 from DGE and £800 from Shell. If all remains the same I don't get £800 per year from DGE until year 25 and at that point I will have received £11,931.77 from DGE and £20,000 from Shell and its not until year 42 that the total paid from DGE overtakes Shell (£33807.94 compared to £33600.00). So thats why i like high yielding shares> I'm not going to be here in 42 years (I might be in 25 just).

OK fair enough if that's how you would do it.

The most important 5 words in your reply to me are "If all remains the same". Now you might mean it differently to how I interpret it but with a big difference in the dividend/retained earnings ratio things don't remain the same, at least how I view things. Very crudely DGE pays out about half its earnings, and retains the other 50%, which it reinvests in the business. RDSB pays out nearly 100% of its earnings as dividends. Were the board of directors of each company to go under the proverbial bus this afternoon, and immediately get replaced with different personnel who adopt a 100% payout at DGE and only a 50% payout at RDSB, then presumably you would value these otherwise identical pair of companies differently.

By paying out 50%, and compounding the 50% retained at its ROC (crudely) DGE would "if all remains the same" have a rising eps, and higher share price for the same P/E. RDSB would be static. If you want to measure your investment's success by cumulative dividends paid alone RDSB will have a head start, and remain so for some considerable time. If you want to include capital, that is your wealth, you will get a different outcome.

For me I would much rather own a company like DGE with a ROC of 17% (and ROE of double that), with a 50% dividend, and 50% retained earnings (or 0% and 100% if I'm honest), than one like RDSB with ROC of 7% and a 100% payout.

How differently would you view things if a 3rd company, which owned only DGE shares, agreed to pay you £800 a year for each £10,000 invested in perpetuity, but you had to agree any share price upside remained theirs?

Anyway this isn't personal, and I'm genuinely interested in the psychology of investing, so wish you the best with your adopted strategy. (I'm hoping for >42 btw, and wish you similar longevity!).

[vrdiver]

I thought I'd take a look at those numbers re a low yield growth share vs a high yield static share. We've already had pointed out that for an income investor, there is a long time to wait for DGE yield to catch up with RDSB, (25 years for the dividends to reach parity and 42 years for the cumulative dividends to do the same).

However, when looking at Total Return, the story is somewhat different! If I go with the figures previously proposed of 5% and 0% capital growth, with 2.5% and 8% yields on capital, then the TR breakpoint occurs in year four, with DGE steaming away thereafter.

For an investor reinvesting dividends and monitoring TR, DGE might well be the better choice*.

For somebody needing to live off of their investments, then high yield now (to me at least) looks better, unless the growth can be harvested in very intermittent tranches (say, leaving it in the market for between 5 and 10 years between sales) but that leave-it-to-compound approach adds a lot of risk if the money is definitely required (e.g. cash reserves are being consumed in place of the sacrificed dividend).



VRD

Nb: table format from http://lemonfoolfinancialsoftware.weebl ... ormat.html

*Better, with the assumptions that the two companies continue to behave the same way, that the investor is not overweight DGE, etc. etc. etc.

[OLTB]

I thought I'd take a look at those numbers re a low yield growth share vs a high yield static share. We've already had pointed out that for an income investor, there is a long time to wait for DGE yield to catch up with RDSB, (25 years for the dividends to reach parity and 42 years for the cumulative dividends to do the same).

However, when looking at Total Return, the story is somewhat different! If I go with the figures previously proposed of 5% and 0% capital growth, with 2.5% and 8% yields on capital, then the TR breakpoint occurs in year four, with DGE steaming away thereafter.

For an investor reinvesting dividends and monitoring TR, DGE might well be the better choice*.

For somebody needing to live off of their investments, then high yield now (to me at least) looks better, unless the growth can be harvested in very intermittent tranches (say, leaving it in the market for between 5 and 10 years between sales) but that leave-it-to-compound approach adds a lot of risk if the money is definitely required (e.g. cash reserves are being consumed in place of the sacrificed dividend).



VRD

Nb: table format from http://lemonfoolfinancialsoftware.weebl ... ormat.html

*Better, with the assumptions that the two companies continue to behave the same way, that the investor is not overweight DGE, etc. etc. etc.

Hi VRD

That's a really interesting table and as someone who is still working (and therefore interested in the above!) was wondering what would happen if the relevant dividends generated were re-invested. So, in your example above, at the start of year 2, RDSB would (with dividends re-invested) have £10,800 capital, generating £864 in dividends. In year 3, Capital would be 10,800 + £864 = £11,664, generating £933.12 in dividends and so on. I am aware that the same exercise would need to be completed for DGE, and that reinvesting dividends into the same stock isn't wholly recommended, but I think it would 'push' the Diff (RDSB-DGE) figures at the end column down a few rows.

I'm not saying anyone has to do this exercise, just that it might be a more realistic position for a HYP 'grower' rather than HYP 'receiver'.

Cheers, OLTB.

[Alaric]

That's a really interesting table and as someone who is still working (and therefore interested in the above!) was wondering what would happen if the relevant dividends generated were re-invested.

If all the money stays in the system, the assumed 8% rate of return on Shell will show up better than the 7.5% (2.5+5) rate of return on Diageo. Making alternative and asymmetric assumptions about what happens to cash will tilt the comparison in one direction or the other.

Another method of comparison would be to discount all the proceeds back to now. Depending on the choice of discount rate, Diageo will look better at a lower rate, Shell at a higher one.

[vrdiver]

Hi VRD

That's a really interesting table and as someone who is still working (and therefore interested in the above!) was wondering what would happen if the relevant dividends generated were re-invested. So, in your example above, at the start of year 2, RDSB would (with dividends re-invested) have £10,800 capital, generating £864 in dividends. In year 3, Capital would be 10,800 + £864 = £11,664, generating £933.12 in dividends and so on. I am aware that the same exercise would need to be completed for DGE, and that reinvesting dividends into the same stock isn't wholly recommended, but I think it would 'push' the Diff (RDSB-DGE) figures at the end column down a few rows.

I'm not saying anyone has to do this exercise, just that it might be a more realistic position for a HYP 'grower' rather than HYP 'receiver'.

Cheers, OLTB.

Agreed. My table is only applicable if the investor is withdrawing the dividends AND interested in Total Return. For an investor interested in TR only, then what matters is the sum of growth and dividends, regardless of which way they are skewed (provided our investor reinvests said dividends and transaction costs are insignificant). As Alaric pointed out, 8% will beat 7.5% whether measured on a single year or compounded for any length of time... For the other extreme, let's call it the"Doris" end of the spectrum, where the only thing of interest is the received dividends, then my comment re RDSB being preferable applies.

Your question highlights the point that the investor's objectives make a great deal of difference to which scenario migth be deemed "best"!

VRD