Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.
Today I’m looking at Diageo (LSE: DGE) (NYSE: DEO.US).
Valuation
At first glance, Diageo looks expensive as the company is trading at a historic P/E of 20.4. However, compared to its closest peers, SABMiller (LON: SAB) (NASDAQOTH: SBMRY.US) and Britvic (LSE: BVIC), as well as the wider sector, Diageo looks if anything, undervalued.
Indeed, the beverage sector as a whole trades at an average historic P/E of 21.6, while close peers SABMiller and Britvic trade at historic P/E ratio of 25 and 25.2 respectively.
That said, although SABMiller and Britvic are Diageo’s closest peers, all three companies produce products that are targeted at different markets.
Balance sheet
| Net-debt-to-assets | Interest cover by operating profit | |
|---|---|---|
| Diageo | 33% | 8x |
| SABMiller | 29% | 6x |
| Britvic | 49% | 4x |
Nonetheless, the beverage market as a whole is highly competitive and only the best companies will prosper. Diageo itself has made a significant impact on the drinks market during the past decade, as the company has grown through acquisitions.
What’s more, these acquisition have been funded with free cash flow rather than debt. As a result, Diageo’s net-debt only amounts to around 33% of assets.
Company’s performance
| Earnings growth past five years | Net profit margin | |
|---|---|---|
| Diageo | 54% | 17% |
| SABMiller | 64% | 15% |
| Britvic | 60% | 4.6% |
Unfortunately, over the last five years Diageo’s earnings growth has lagged that of SABMiller and Britvic. However, it would appear that Diageo’s earnings have been hampered by an erratic tax rate imposed on the company during the five-year period.
In particular, the company’s tax rate went from 14% during 2011, to 33% during 2012 and then fell back to 17% during 2013.
Dividends
| Current Dividend Yield | Current dividend cover | Projected annual dividend growth for next two years. | |
|---|---|---|---|
| Diageo | 2.3% | 2.2 | 16% |
| SABMiller | 2% | 2.4 | 28% |
| Britvic | 3% | 1.5 | 11% |
| Sector average | 2.2% | 2.1 |
Nonetheless, Diageo still offers a dividend yield of 2.3%, which is slightly above the sector average of 2.2%. In addition, Diageo’s payout is covered more than two times by earnings, once again above the sector average.
Moreover, City analysts expect Diageo’s dividend payout to grow around 16% annually for the next two years, an impressive rate of growth, although it does lag that of peer SABMiller.
Foolish summary
All in all, Diageo does not look to be the best company in this trio as SABMiller’s history of earnings growth is more impressive and the company has a lower level of debt.
Still, Diageo’s higher than average profit margin and the company’s exposure to the Scotch whiskey market, which is set to grow rapidly during the next few years makes the company look attractive.
So overall, I feel that Diageo is a much stronger share than its peers.
