3-Point Checklist: Should You Buy Diageo plc, SABMiller plc Or A.G. Barr plc?

Should your drinks money be spent on Diageo plc (LON:DGE), SABMiller plc (LON:SAB), or A.G. Barr plc (LON:BAG)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Sin stocks like Diageo (LSE: DGE) (NYSE: DEO.US) and SABMiller (LSE: SAB) have a long history of outperforming the market and delivering above-average shareholder returns.

In this article, I’m going to compare Diageo and SABMiller, along with Irn Bru maker A.G. Barr (LSE: BAG), to see which looks the better buy in today’s market.

1. Profit and dividend growth

How fast have earnings per share (eps) and dividend risen at each firm over the last five years?

Should you invest £1,000 in The Sage Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if The Sage Group Plc made the list?

See the 6 stocks

 

Diageo

SABMiller

AG Barr

5-year average eps growth

7.7%

6.5%

5.9%

5-year average dividend growth

6.3%

9.1%

7.4%

There are some slight differences, but the picture is clear: earnings growth has been significantly above inflation, and shareholders have enjoyed a dividend income that’s risen in real terms.

2. How profitable?

All three of these companies trade at a premium valuation, and have done for many years. One of the main reasons for this is that they are very profitable, as these figures show:

2014/15

Diageo

SABMiller

AG Barr

Operating margin

22.8%

20.5%

16.1%

Return on capital employed

11.1%

10.9%

21.1%

The differences here are interesting: while Diageo and SABMiller both boast superior operating margins, Barr’s superior return on capital employed (ROCE) suggests it may ultimately be a better business for shareholders. ROCE measures the return on shareholder fund and debts generated by a business. A return in excess of 20% is impressive.

3. What’s next?

We’ve seen how these three drinks firms have performed over the last five years, but what about the future?

Currency headwinds and slowing emerging market growth have impacted on Diageo and SABMiller’s performance, while Barr’s UK focus has helped it maintain momentum as our economy has started to recover.

These trends look likely to continue over the next two years, based on the latest City forecasts:

 

Diageo

SABMiller

AG Barr

2015/16 forecast eps growth

-7.5%

+6.3%

+9.5%

2016/17 forecast eps growth

+9.1%

+4.4%

+7.4%

I remain bullish on Barr: although the firm warned this week that price deflation in the UK could put pressure on revenue growth, I don’t believe this will derail Barr’s attractive long-term story.

Today’s best buy

Barr has one other advantage over its two larger peers — it has net cash, whereas both SABMiller and Diageo are burdened with high levels of debt. These firms’ high profit margins have meant that this hasn’t been a problem historically, but it is an additional risk.

All three companies trade on a forecast P/E of about 20 and offer prospective yields of between 2% and 3% — these aren’t cheap stocks.

However, I believe that all three should continue to deliver solid returns for investors, thanks to their strong brands and the sticky nature of their products — people are loyal to their favoured drinks.

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares in Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Prediction: 12 months from now, the Vodafone share price could turn £5,000 into…

Could the Vodafone share price jump by 30% over the next 12 months? Zaven Boyrazian takes a closer look at…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Prediction: 12 months from now, the Aviva share price could turn £5,000 into…

The Aviva share price tumbled in the tariff-induced market turmoil, but could this have created a new buying opportunity for…

Read more »

Investing Articles

Prediction: 12 months from now, the BAE share price could turn £5,000 into…

With EU defence spending on the rise, the BAE Systems' share price could surge… right? Not necessarily. Zaven Boyrazian digs…

Read more »

Investing Articles

Up more than 50% in a month! What’s going on with the Greatland Gold (GGP) share price?

The Greatland Gold (GGP) share price has been the best performer on the FTSE AIM 100 index over the past…

Read more »

Investing Articles

Prediction: 12 months from now, the IAG share price could turn £5,000 into…

Zaven Boyrazian explores how high the IAG share price can fly over the next 12 months and what factors investors…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

Prediction: 12 months from now, the BP share price could turn £5,000 into…

The BP share price crashed in April following the aftermath of US tariffs and tumbling oil prices. But is this…

Read more »

Investing Articles

14.2% dividend yield! Is this FTSE income stock worth considering in 2025?

This clean energy trust offers the highest dividend yield in the FTSE 350 right now, but is the double-digit payout…

Read more »

Investing Articles

£5,000 invested in the S&P 500 at the start of 2025 is now worth…

2025 has been a bumpy ride for the S&P 500, tumbling towards a correction before falling further on tariff news…

Read more »