Monday, 27 October 2014

BUY: Diageo--Raising my glass to dropping prices

Price: 1704.48
Shares: 41
Predicted annual dividend income: £21.20

The increasingly volatile markets has made for a rather nice buying time for many people. Already this month I have cashed in with a top-up purchase of HSBC. However, in reality my eyes had been on others companies in  other sectors. My financial segment is looking a little too large at the moment.

Several companies on my watchlist were within the broadly understood food and drink sector. In the end, the price drops pushed me towards my favoured stock in this area: Diageo.

Top Quality Brands

Diageo has always caught my eye partly due to the impressive stable of alcoholic brands. They include Smirnoff, Johnnie Walker, Baileys, Gordons, Tanqueray, Captain Morgan and--my particular favourite of the lot--Guinness.

Of course, these brands don't just make familiar reading. They make stable sales. These tipples include some of the biggest in their sector and thus result in consistent and substantial sales. Recently there has been some issue with slowing sales. However, overall, the company looks stable, consistent and well-run. All top marks for me.

So what about the figures?

Tantalising P/E ratio

First of all, after having waited for some time for the price to drop it finally happened. However, it did not quite dip below the P/E of 17 I was hoping for. However, as we can see from next year's predictions, it was not too far off with a 2.5% growth pencilled in:

EPSP/E Ratio
Difference (%)17.47

With even the lowest consensus showing a P/E of 18.17 I am quite content with this figure for such a high-quality defensive company.
What is more, for the year after, we see a potential 7.5% EPS growth which leads to a P/E ratio which looks even better:

EPSP/E Ratio
Difference (%)12.88
Again, here we see the benefit of such consistent companies. With a consensus P/E of just over 16 we are looking at Diageo looking very reasonable indeed. 

Dividend Growth

What is more, this consistent--if slowish--predicted growth in EPS is matched by a nice dividend yield growth predicted with both this coming year and next expected to see a c.8% growth with a dividend of 55.02p per share and 59.35p per share. This would leave me with a yield of 3.23% and 3.48%.

What is more, this will maintain a dividend coverage of about 1.8 times EPS which for me--for such a solid company--is more than ample. 

Again. for such a good solid company having a yield around the FTSE 100 average is exceptional. 

Diageo and my goals

So where does Diageo fit into my goals? Well firstly, as a new holding in my portfolio it helps diversify my portfolio further. A good thing by all measures. And Diageo is also in a new industry for me (beverages) and so I now sit on 15 companies across a number of industries which is also good for my targets for the year.

What is more, Diageo being such a defensive company has a Beta of just 0.6. This is ideal for trying to reach my target of 0.85 or less.

Similarly, although the yield will slightly pull me away from my target portfolio yield of 3.5%. However, it is not by much and hopefully over time will increasingly provide a nice upward swing in income.

Also, I will not receive any income from Diageo in this calendar year. This means that it will not add anything towards my target of £200 income for this year. However, this does not concern me as I am still on track to easily surpass this total this year.

[Creative Commons image reproduced from Flickr user Stephen Edgar]

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