2014 has been a very different experience for investors in Diageo (LSE: DGE) (NYSE: DEO.US) than it has been for their counterparts in SABMiller (LSE: SAB). That’s because, while the former has seen its share price fall by 9% since the turn of the year, shares in the latter have made gains of 10% year to date. However, Diageo could turn out to the better performer moving forward for these three reasons.
Differing Products
Both Diageo and SABMiller have a stable of highly lucrative brands that enjoy a large amount of customer loyalty across the globe. However, taking into account the future potential of the global economy, Diageo could be in a better position than its sector rival.
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That’s because of the type of products it sells. Diageo tends to focus on premium spirits such as whisky and vodka, and in recent years has introduced even more expensive versions of its popular lines. This move has been in response to the increased wealth of customers in emerging markets, and this could provide the company with a major opportunity moving forward.
Indeed, the rise of wealth in emerging markets seems to play into the hands of Diageo, since there is a high correlation between demand for premium spirits and economic prosperity. This means that as emerging markets continue to grow and the disposable incomes of their populations increase, demand for Diageo’s products should also increase.
This is in contrast to SABMiller, which has a wide range of beers in its portfolio. Although also popular in emerging markets, it could prove to be the case that as economic prosperity improves, individuals seek out premium alcoholic drinks and shift consumption away from beer in the long run.
Differing Valuations
At least partly because of their differing fortunes this year, shares in Diageo and SABMiller trade on very different price multiples. For example, while Diageo’s price to earnings (P/E) ratio of 18.1 may at first glance appear to be rather high, on a relative basis it looks attractive. That’s because SABMiller currently has a P/E ratio of 22.3. This shows that Diageo offers better value for money than SABMiller and has the greater scope for an upward revision to its current rating.
While neither company beats the FTSE 100’s yield at present, Diageo has much more income appeal than SABMiller. It yields 3.1% versus just 2% for SABMiller and this means that only Diageo is the realistic income play at current price levels. Furthermore, Diageo’s yield looks set to increase at a brisk pace, with dividends per share expected to be 7.1% higher in the current year than they were last year, for example.
