Should I Buy Diageo plc (DGE)?

Diageo plc (ADR) (NYSE:DEO)LONDON — I’m browsing for bargain shares right now, so should I pop Diageo plc (LON:DGE) into my basket?

Go, Diageo!
It’s rare for investors to agree, but a strong consensus seems to be developing around global drinks giant Diageo plc (LON:DGE), which owns Guinness, Johnnie Walker, Baileys, and many other top brands. It’s a great company, but the shares are expensive. So are they too expensive?

Outgoing chief executive Paul Walsh has transformed Diageo since taking over 13 years ago, creating the world’s biggest premium-drinks company. His acquisition-driven growth strategy tripled the company’s share price in that time, but he’s calling last orders from July, and that will worry many investors. Will Diageo plc (LON:DGE) miss Walsh as much as Tesco misses Sir Terry Leahy?

Following an inspirational leader is never easy. Cynics often say that good leaders move on because they can see trouble coming. That’s another worry, especially given April’s disappointing interim management statement, which admitted that Western European sales had dropped 4%, with peripheral eurozone troubles giving Diageo plc (LON:DGE) a nasty hangover. However, that performance was offset by 6% growth in North America.

Ivan can?
So what will new chief executive Ivan Menezes do to keep the growth party going? The same as almost every other FTSE 100 boss right now: target emerging markets.

Menezes reckons Diageo can hit its target of generating 50% of its profit in the developing world within just three years, up from 40% today. The firm’s recent statement showed 14% growth in Latin America and the Caribbean, as well as 9% growth in Africa, Eastern Europe, and Turkey, plus 4% in Asia-Pacific. There was, however, slippage in Brazil, Korea, and Nigeria.

I bought Diageo plc (LON:DGE) in May 2010 at £11.27. Today, it trades at £19.57 — a rise of 74%. Its share price is up 23% over the past 12 months, versus 18% for the FTSE 100, but the figure that catches everybody’s attention is its pricey P/E ratio of 20.8 times earnings, versus 12.5 times for the index. The PEG ratio of 1.6 is on the higher side as well.

Diageo is forecast to post earnings-per-share growth of 12% for the year to June 30, 2014, but living up to that valuation is still a tall order. The yield has dipped to a disappointing 2.2% (compared to 3.5% for the index as a whole), although the payout is covered a healthy 2.2 times, and the income is forecast to hit 2.7% next year.

Drink up!
With a 22% operating margin and a 43% return on capital employed, Diageo plc (LON:DGE) is a smooth operator. That said, it is heavily geared, with net borrowings hitting a hefty £8.43 billion in March, up from £7.89 billion in December.

I last took the firm’s measure in September, when it traded at 17.4 times earnings and yielded 2.6%. I decided then that it looked expensive, and it looks even pricier today. With markets looking a little shaky right now, I’m tempted to drink some of my profits.

The article Should I Buy Diageo? originally appeared on Fool.com and is written by Harvey Jones.

Fool contributor Harvey Jones owns shares in Diageo. The Motley Fool recommends Diageo (ADR).

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!