Diageo (DEO) Stock Analysis

Who owns the No.1 in: Scotch Whiskey, Canadian Whiskey, Premium Vodka, Liqueur, Gin & Stout in the world?  Ever hear of Johnnie Walker, Crown Royal, Smirnoff, Baileys, Tanquerray & Guinness.  We sure have and I’ve seen many friends drink these over the course of this past weekend even.  And it got us Diplomats thinking… who owns these guys?  I (Lanny) knew who owned Baileys and it caused the diplomats to get the coffee brewing and to crack open our research madness.

Screen Shot 2014-08-02 at 2.51.23 PMOur research and quick googling allowed us to land on Diageo (DEO) and reviewing their branding.  Last night I was at a bar with my friends and they kept ordering Ciroc & Sprites or Walker on the rocks.  Before the night began, we had a pot of coffee on and we were all discussing how we wished our friend had Bailey’s so we can add to the fresh roast.  The vast amount of our population that drinks is astounding, with the varying drinks that individuals have are all over the place.  The first stop of the night at a bowling alley from a girl that had just turned 21 ordered a half Guinness and half Angry Orchard.  In one night, literally, 4 brands of Diageo were consumed by 4 different people, multiple times.  I’m not the biggest drinker, but I do not mind having Bailey’s or Ciroc every once in a while.

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Today Bert and I decided to dive nose deep into the company, as their Fiscal Year ends June 30, 2014.  Net income hovered around $3.8B with total assets up $806 million.  They have increased dividends for only 4+ years, but they are an internationally based company (London) and pay only twice per year (April & October).  Their current trailing 12 month dividend yield shows approximately 2.68%, which is well above the current S&P 500 average of 1.94%.  Based on earnings per share of $6.75/share, the payout ratio is 47.41% with a price to earnings of 17.67 currently, which the forward/projected EPS of $7.15 pushes the forward price to earnings to 16.68.  Interesting.  The company has a current P/E below the S&Ps 19, a stronger payout ratio, positive forward looking earnings, a yield above the average, and the increases show an average of 7.2% dividend growth over the last 4 years.  That’s a lot of fact in one sentence, almost as if I had one too many Smirnoff and Sodas… Bert was reviewing the release and management’s commentary to see how things are going, what Bert’s eyes are seeing and what his gut is showing (no, no I don’t think Bert is a huge whiskey fan, so not that kind of feeling in your gut).  Check what Bert sees.

Thanks Lanny. I decided to dive into the company’s earnings transcript and press release to find a few key drivers for the company.  Based on my review, we found three major drivers that will the company’s performance in the coming year:

  1. Emerging Market Performance. Over the last couple of years, the company has invested billions to establish a presence in emerging markets and take advantage of the growing middle class. You pick up their earnings release and it is no secret that the company did not perform well in this sector.  The company was hit hardest in China and Southeast Asia which saw organic sales volume decline by 20% and 25%, respectively.  One of the company’s top selling brands in China, Shui Jing Fang, had net sales declined 78% due to intense price competition with other brands (Source: Press Release).  Going forward, management is re-vamping their strategy for this brand to reduce the prices and develop new distribution routes to bring the product to new consumers.  In the earnings call, management was quick to express how all the other brands are making progress in China and are slowly increasing the sales volume.  So the damage appears isolated to only a few brands.   Overall in the emerging markets, management expects single digit growth in emerging markets and is anticipating a return to double digit growth in the near future.   Management has a plan in place to combat their recent struggles and re-establish the brands that have been shaken.  However, this plan will take time and shareholders may not enjoy the fruits of this plan until fiscal year 2016.
  2. North American Rebranding– Diageo’s premium alcohol market in North American was slightly impacted by aggressive pricing from its competitors. The company is planning on dropping the prices of Smirnoff, Johnnie Walker, and Crown Royal to focus on growing the company’s sales volume.  North America appears to be the strongest region for the company.  Even with the pricing pressure the company faces, the company’s strong stable of brands propelled sales and net margin in the region.  I believe if the company can find the perfect price for its products; it has a chance to continue to grow its presence in the United States.  As Lanny mentioned above, look at any bar or liquor cabinet at home.  Chances are you will find several Diageo products.  The million dollar question is can this re-branding strategy continue to deliver stellar results.
  3. Cost Savings. What has every company done since the recession to boost the bottom line: Cost cutting. Last year Diageo began its efforts to trim the fat and plans to continue to find measures to reduce costs and last year, saving between 70 to 80 bps of their final margin. While cost cutting can only go so far, the current levels have an opportunity to help offset the impact of their re-branding of Chinese brands (which the company anticipates will begin in fiscal year 2016).  I am always in favor of companies finding ways to cut costs and become more efficient.  This is great to see the company taking such measures to improve their bottom line.


Diageo is a unique company in the sense that the company owns so many major brands worldwide.  As the company continues to cast its net in foreign markets, it is experiencing some growing pains and is facing competition from local, lower cost competitors.  Management has a strong response to the competition and has already began aggressively responding to the competition.  Based on the current levels, we think the company is still trading at a slight premium and we will continue to keep a close eye on the stock price.  The company’s focus on growing dividends and the payout ratio below 50% make it an attractive addition to our portfolio, just a lower price.


5 thoughts on “Diageo (DEO) Stock Analysis

  1. Great overview, DD. I really like DEO and it has been on my watchlist for a while now. I just need to figure out when to pull the trigger. While the dividends being twice a year isnt my part of the company, the decent dividend growth makes up for the wait.

    DEO is great since they are heavily invested in alcohol brands such as scotch and whisky, which has a very wide moat. Whiskies have to be aged 8,10,12,18 years and no one can just break into the market with those kind of time horizons. On the other hand, something like vodka is very easy to break into – hence why you see so many new brands popping up with just as good or better vodka on the market.

    Another request for your future Dividend Stock Analysis – would be great to have a list of all the direct competitors for a company.

    Keep up the great work

  2. DEO is a great company with many well known brands sold all over the world. It has been one of my holdings since 2007 and I plan to keep it for many, many more years. Too bad the dividends are paid twice a year instead of four. In any case, a strong dividend payer and grower as well.

  3. Thanks for sharing the stock analysis. Solid companies with some very reputable and popular brands. Nice add to any dividend stocks portfolio. AFFJ

    BTW, I have added a link of your recent analysis to our Collection of Dividend Stock Analyses. 🙂

    • FFJ,

      You are too sweet for adding our analysis — thank you! DEO is very interesting – their brands dominant certain aspects of the industry and I see their labels, everywhere. It’s an interesting international play, but a play that I don’t think is slowing down anytime soon, you know? I’d like to see more of a pullback at this point and with days like today – I hope that DEO and others take a hit with the market.

      Thanks again, we appreciate all of the support, talk soon!


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