Friday, August 29, 2008

Diageo (DEO) Dividend analysis

Diageo plc engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine worldwide.
Diageo is an international dividend achiever. The company has been increasing its stock dividends for the past 10 consecutive years. From the end of 1997 up until August 2008 this dividend growth stock has delivered an annual average total return of 10.90 % to its shareholders. Diageo is the first international dividend company that I have analyzed in my pursuit of international exposure for my stock portfolio.

At the same time company has managed to deliver a 7.20% average annual increase in its EPS since 1998.

The ROE has increased from 29% in 1998 to 36% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 8.10% each year, which is higher than the growth in EPS. An 8% growth in dividends translates into the dividend payment doubling almost every 9 years. DEO has indeed managed to double its annual dividend payment of $1.395 in 1999 last year (2007).

If we invested $100,000 in DEO on December 31, 1997 we would have bought 2892 shares. In April 1998 your semi-annual dividend income would have been $2406. If you kept reinvesting the dividends though instead of spending them, your semi-annual dividend income would have risen to $6582 in September 2007 and $4272 by June 2008. For a period of 10 years, your annual dividend income would have increased by 67%. If you reinvested it though, your annual dividend income would have increased by 129.60%.

The dividend payout has remained above 50% for the majority of our study period with the exception of 2006. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that DEO is attractively valued with its low price/earnings multiple of 16 and above average yield at 3.60%. Even though the dividend payout is higher than the 50% I like the fact that it is has been steadily decreasing over the past decade.

I will keep looking for growing internationally based corporations which have increased their dividends and earnings consistently for at least five to ten years.

Disclosure: I do not own shares of DEO

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