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Share tip of the week

Each week, our analysts put the spotlight on a company from our list of recommended shares to buy. As always, it's recommended as a medium/long term investment (approximately 18 to 36 months). This week's share tip of the week is...

Diageo (DGE)

  Company Sector Current price
(pence)
Change
today
  
Investment
objective

Risk
Our
view
  Diageo (DGE) Beverages  2305.00 c  -1.33%    Balanced Lower  Buy
 Analysis last updated on 23/06/17 at 2341p Recommended stop loss of 12.5%

View charts, and further company data

Company overview

Diageo is a global alcoholic beverages group with a wide product range spanning whisky, vodka, wine, beer, gin and liqueurs. With operations in 180 countries it owns many well-known global brands such as Johnnie Walker, Guinness, Smirnoff, Baileys and Captain Morgan.

Our view

Under/over valued?
Interim results in January pleased the market as they showed a strong uptick in growth across all the company's main regions. Net sales rose 14.5% to £6.4bn with operating profit up 28%, partly boosted by favourable currency movements. The dividend was raised 5%.

A trading update in May confirmed that it remains on track to achieve mid-single digit organic growth over the next three years. Along with 1 percentage point margin growth.

The shares trade on a 2018 PE of 20.6 and a dividend yield of 2.8%, which is about average compared to peers Remy Cointreau and Pernod Ricard.

We continue to recommend a ‘Buy' on Diageo because of the strength of its brands, resilient sales in the US market, excellent long-term prospects for emerging markets, continued improvements in cost-cutting and a relatively good dividend yield. Given the recent rise we would suggest drip feeding into the stock.



Bullish points

• Good product mix, spread across beer, stout and spirits, and geographical diversification with exposure to large, developed markets such as the US, as well as fast-growing emerging markets in Asia and Africa.

•A large proportion of sales come from the US and so the group is benefiting from the weakness in Sterling.


• Diageo boasts an enviable portfolio of brands, including two (Johnnie Walker and Smirnoff).

•Well placed for increased demand for spirits in the US and now that is has full control of USL in India, its most important emerging market, prospects are better there as well.



Bearish points

• Headwinds to growth persist in some emerging and developed markets due to economic uncertainty, while currency depreciation impacts consumer demand.


• Consumer demand in parts of Europe continues to drag as austerity, high unemployment and structural reform weigh on sentiment.


Comment updated 23 June 2017



Author: Ian Forrest, Investment Research Analyst

The facts

Diageo generates around 33% of sales and almost half of its operating profits from the North American market.

Below are the trailing 12 month results to the end of the final period versus the previous 12 month trailing period. As we are reporting rolling returns below, the data will be different to that which you see on other parts of our web site. Results are as follows



Current

Basic Earnings per Share 98.8 pence

Dividend per Share 57.5 pence

Dividend Yield 2.6%

Revenue £10,519 million

Operating Profit/(Loss) £2,810 million



Previous

Basic Earnings per Share 77.8 pence

Dividend per Share 53.5 pence

Revenue £10,226 million

Operating Profit/(Loss) £2,720 million

Debt to Equity 120.1%



Change

Basic Earnings per Share 27%

Dividend per Share 7.5%

Revenue 2.9%

Operating Profit/(Loss) 3.3%



Forecast Estimates 2018

Earnings per share 114 pence

P/E 20.3

Dividend yield 2.6%





Month(s) company is expected to go ex-dividend

September

February

View our previous recommendations

Please read our investment research policy to understand how our analysts reach their recommendations.



Valued using at least 15 minute delayed prices (where available)

Prices may fluctuate and appear inconsistent with the day's trading on or around the opening and closing of the stock market. This is due to the pre and post market auctions for certain LSE stocks, this is usually between 07:30 and 08:15 and from 16:30 until 17:00. The day's closing prices are indicated with a "c" against the price.