Friday, March 21, 2014

Diageo (DEO) Dividend Stock Analysis

Diageo plc (DEO) produces, distills, brews, bottles, packages, and distributes spirits, beer, wine, and ready to drink beverages. This international dividend company has increased dividends for 15 years in a row.

The company’s latest dividend increase was announced in January 2014 when the Board of Directors approved an 8.80% increase in the interim dividend to 19.70 pence /share. The company’s peer group includes Brown-Forman (BF.B), Beam (BEAM), and Constellation Brands (STZ).

Over the past decade this dividend growth stock has delivered an annualized total return of 12.40% to its US ADR shareholders.


The company has managed to deliver an 8.90% average increase in annual EPS in British Pounds since 2004. Diageo is expected to earn $6.82 per share in 2014 and $7.27 per share in 2015. In comparison, the company earned the equivalent of $6.19/share in 2013. Each American Depository Receipt (ADR) that you can purchase on the NYSE is equivalent to four shares that are traded on the London Stock Exchange.

Between 2004 and 2013, the number of shares decreased from 3.03 billion to 2.52 billion.

Diageo owns a portfolio of strong brands, with wide consumer appeal, which are usually number one or two in their respective categories. A few include Smirnoff, Johnnie Walker, Guinness, Baileys, and Captain Morgan. The company also has a wide distribution network on a global scale, which might be difficult for a competitor to replicate. Diageo is the largest spirits company in the world, which provides it with the advantage of scale, relative to its competitors.

Future growth could be driven by organic growth of its premium brands as well as through strategic acquisitions. The company has also focused on its core competencies, by disposing of Pillsbury and Burger King in the early 2000s. North America accounts for one third of sales but over 40% of annual profits. Emerging markets in Asia, Africa and Latin America account for 40% of sales. Continued investments in strategic emerging markets could translate into higher sales in the future, particularly as the number of middle class consumers who will be able to afford premium drinks rises significantly.

The annual dividend payment has increased by 5.80% per year over the past decade, which is lower than the growth in EPS.

A 6% growth in distributions translates into the dividend payment doubling every twelve years on average. The expected dividends in 2014 are roughly double the dividends paid in 2003.

Dividends on the ordinary shares are normally paid twice a year: an interim dividend in April and a final dividend in October. The approximate split between the two payments is 40:60.

The dividend payout ratio has decreased from 56.50% in 2004 to 45.50% in 2013. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The company has really high return on equity, which is common for most high quality dividend payers that do not require a lot of equity to operate the business. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.


Currently, the stock is attractively valued, as it trades at a P/E of 18.20 and yields 2.60%. I am analyzing the company because I believe it is quality dividend growth stock, which is very good addition to my portfolio when it is below a P/E of 20 and at a current yield above 2.50%. I currently find Diageo to be a much better value than Brown-Forman (BF.B), at 29.60 times earnings and yield of 1.60%. I recently purchased Diageo shares for my taxable and tax-deferred accounts.

Full Disclosure: Long BF.B, DEO

Relevant Articles:

International Dividend Stocks – Pros and Cons
Brown-Forman (BF.A)(BF.B) Dividend Stock Analysis
Strong Brands Grow Dividends
Four Practical Dividend Ideas for my SEP IRA
Five Quality Dividend Payers I Bought on the Dip

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